viernes, mayo 12, 2017



Why Now Precious Metals?

By: Richard Mills

John Exeter's Inverted Pyramid

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

John Exter was an American economist and a member of the Board of Governors of the United States Federal Reserve System.

Exter is known for creating Exter's Pyramid - useful for visualizing the organization of asset classes in terms of risk and size.

When the credit system is expanding most money flows to the top of the pyramid - the increasingly speculative and illiquid investments. When the credit system comes under pressure and debt cannot be repaid, the items at the top of the pyramid get sold and money flows towards the bottom.
"In order to make use of it though, we must first make the distinction between real wealth and claims on wealth. Real wealth is represented by actual items that people want or need. This can be food, land, natural resources, buildings, factories etc. Financial assets, shown as layers in the pyramid, represent claims on real wealth. In a fully developed financial system, in good perceived standing, there is a high ratio of claims on wealth to actual underlying real wealth. In this environment the average buying power of the financial assets is lower. This can best be observed by looking at the purchasing power at the bottom of the pyramid. Gold is at a minimum here. It is competing with all of the other claims on wealth for a relatively constant amount of underlying real assets. 
According to Exter's theory of money, when economies get into trouble through the accumulation of too much debt, the levels of the pyramid disappear in order from highest to lowest. As the pyramid contracts downward, the remaining layers represent a proportionally higher claim on the real underlying wealth. In other words their value increases. Using gold as our reference point, it's relative purchasing power increases as the pyramid contracts. Gold finds itself in a secular bull market." ~ Trace Mayer, The Paper Empire

The Debt Pile

In January of 2017 the Institute for International Finance (IIF) reported global debt levels - total world debt - rose to more than 325 percent of the world's annual gross domestic product in 2016. Global debt had risen more than $11 trillion in the first nine months of 2016 to more than $217 trillion with general government debt accounting for almost half of the increase.

Total Debt to GDP
US Dollar Index
U.S. Dollar

The IIF said "an environment of subdued growth and still-weak corporate profitability, a stronger (U.S. dollar), rising sovereign bond yields, higher hedging costs, and deterioration in corporate creditworthiness presented challenges for borrowers...a shift toward more protectionist policies could also weigh on global financial flows. Moreover, given the importance of the City of London in debt issuance and derivatives (particularly for European and EM firms), ongoing uncertainties surrounding the timing and nature of the Brexit process could pose additional risks including a higher cost of borrowing and higher hedging costs."

Moody's Investors Service Inc. reports that US$3.9 trillion worth of global private debt (the combination of business debt and household debt) was issued in 2016, a record high.

For the full year 2016, total U.S. household debt rose by $460 billion to $12.58 trillion, the biggest annual increase in a decade. Total U.S. household debt is $99 billion (0.8%), shy of its all-time peak of $12.7 trillion set in Q3 2008 just as the financial crisis was starting. When measured as a percentage of GDP, total household borrowing today is 67% of nominal gross domestic product, compared with 85% in 2008.

Household Debt
Business Insider 1 year chart showing explosion in household debt

"The only way to keep payments current is with a low rate environment. There is no choice. So central banks will do everything they can to print this debt into oblivion. In many ways this is a reason that we have seen a rush into... anything that isn't just a bunch of 1s and 0s on a central bank computer easily changed by the whims of politicians and those connected to them." ~ MyBudget360
Up to 85 per cent of borrowing is being used to finance existing corporate assets, real estate or unsecured personal finance. Borrowers are more often than not financing pre-existing assets thinking price rises are to be the source of repayment.
"Private debt is a beneficial and essential part of any economy. However, as it increases, it can bring two problems. The first is dramatic. Very rapid or "runaway" private debt growth often brings financial crises. Runaway private debt growth brought the 2008 crisis in the United States, the 1991 crisis in Japan, and the 1997 crisis across Asia, to name just three." Richard Vague, The Private Debt Crisis
Winds of war

"I spent many years in the trenches of the first Cold War, and I don't want to die in the trenches of the second. We are back to 1983, and I don't enjoy being thirty-four years younger in this way. It's frightening." Trump, Putin, and the New Cold War

"North Korea's UN deputy representative, Kim In Ryong, on Monday unleashed at a hastily called UN press conference a torrent of threats, war scenarios and rhetoric aimed at the United States." North Korean envoy at UN warns of nuclear war possibility

"Think of two significant trend lines in the world today. One is the increasing ambition and activism of the two great revisionist powers, Russia and China. The other is the declining confidence, capacity, and will of the democratic world, and especially of the United States, to maintain the dominant position it has held in the international system since 1945. As those two lines move closer, as the declining will and capacity of the United States and its allies to maintain the present world order meet the increasing desire and capacity of the revisionist powers to change it, we will reach the moment at which the existing order collapses and the world descends into a phase of brutal anarchy, as it has three times in the past two centuries. The cost of that descent, in lives and treasure, in lost freedoms and lost hope, will be staggering." ~ Backing Into World war III

"As much of the world focuses on the growing hostilities between the United States and Russia as well as the war in Syria heading into 2017, it would be easy to forget about an ongoing conflict between two nuclear-armed neighbors." ~ India-Pakistan War In 2017?

The Council on Foreign Relations' (CFR) ninth annual Preventive Priorities Survey identified seven top potential flashpoints for the United States in 2017.

North Korea warns of 'super-mighty preemptive strike' as U.S. plans next move

"Foreign Minister Mevlt Cavusoglu, on March 16, commented on the general elections in the Netherlands and the election victory of Prime Minister Mark Rutte's liberal VVD party, warning that Europe will soon be the site of religious wars." ~ Turkish FM Warns "Religious Wars" Will Soon Start in Europe

Here is an older but excellent, and still very much relevant, read from the New York Times 'This Is a Religious War.'

Mined Gold Peak Production

Mined peak gold production was expected in 2015. I'm going to suggest, with the help of the following charts, it might very well of been Q3, 2016.

According to the World Gold Council mined gold totaled 3,236t in 2016, virtually unchanged from 2015. Production peaked in Q3 2016, when 850.4t was brought on to the market, before falling back to 810.9t in Q4 (-2% y-o-y).

Peak Gold Production
Global Gold Reserves and Resources
Gold reserves by Stage of Development
Large Cap Gold Reserves and Reserve Life
Gold Discovery versus Production
Average Number of Years Between Discovery and Production
New Mine Contribution to World Gold Production
Gold Mines producing versus Undeveloped
Mining Deals in 2016
Gold Miners Capital Expenditures
Gold Production 2017-2025
Gold Supply, Production and Hedging

Mined gold totaled 3,236t in 2016, virtually unchanged from 2015


Are the tanks going to roll, the missiles fly? Is economic collapse and/or war in our near to medium term future? I'm not betting against either, one or both seem a real possibility to your author.

Have we indeed reached mined peak gold production? With future mines being on average much lower grade then mines currently in production, at the very least, considering it takes up to 20 years from discovery to production, it's not hard to believe we are have reached peak mined gold for this mining cycle.

Only time will tell for sure. But if I was looking (and I always am), for superior investment vehicles to take advantage of what I think I know regarding the future I'd be buying gold and silver bullion and near term gold and silver producers.

Historically junior resource precious metal focused companies have offered the greatest leverage to increasing demand and a rising gold/silver price.

Leveraging into junior gold and silver companies owning the better precious metal projects should be on all our radar screens.

Is there at least one soon to be junior gold producer on your radar screen? I have two on my mine, have you got any on your screen?

If not, maybe you should.

The Limits of Economic Optimism

Kemal Derviş
. IMF spring meeting

WASHINGTON, DC – As the annual spring meetings of the World Bank and the International Monetary Fund commence, the world’s economic future appears brighter than it has in some time. The international financial institutions, not to mention many private-sector actors, are projecting significantly faster growth this year than in 2016. Is their buoyant outlook warranted?
Until recently, most macroeconomic indicators were regularly leading to downgrades in growth projections. Now, the opposite seems to be happening. The IMF’s recent flagship report raised its projection for world GDP growth for 2017 from 3.4% to 3.5%, compared to the estimated rate of 3.1% for 2016.
Likewise, the multi-indicator Brookings – FT TIGER Index points to a “broad-based and stable” recovery. According to these projections – which are based on models, new data, and the judgment of the particular institution or forecaster – the United States, the United Kingdom, and Japan are contributing the most to the uptick in growth. India is also doing particularly well.
Deciphering these projections’ various components – from the new information to the forecasters’ hypotheses – would be a huge task. But, whatever reasons for optimism forecasters may have, there are also strong grounds for caution, especially in the medium and long term.
Forecasters, like markets, are often influenced by “herd instinct.” The greater the number of analysts who subscribe to a particular view, the more likely it is that additional analysts will shift their own forecasts in that direction. In this case, the majority’s rather optimistic view has been buttressed by a broad sense of relief.
Both the Brexit vote in the UK and the election of Donald Trump as US president raised fears of economic disaster. Yet, so far, neither development has had particularly dire economic consequences.
On the contrary, market confidence remains high, boosting expectations of increased investment and consumption. It is telling that the US Federal Reserve has now pursued modest interest-rate hikes without triggering an adverse reaction even in emerging markets, which last year were dreading such a move.
Against this background, economic optimism makes some sense. But growth remains vulnerable to the as-yet-unresolved issues that kept dragging down previous forecasts.
One of those issues is slowing productivity growth, which has held back global economic performance, to varying degrees, for the last two decades, with no sign of reversal in sight.
Another is economic inequality, which seems largely to be worsening, as wealth becomes increasingly concentrated at the top of the income distribution.
Inequality seems likely to continue to undermine aggregate demand, even if GDP growth accelerates in the short term. Not even a decline in unemployment would do much to boost demand, not least because such a shift could well be driven by falling labor-force participation, as has often been the case in the US. This points to another vulnerability: weaknesses within labor markets that have proved particularly damaging for the young.
Then there is climate change. The world has still not answered what is perhaps the biggest question affecting long-term growth: how can the global economy continue to expand rapidly, without allowing the average global temperature to climb more than 2° Celsius above its pre-industrial level?
With the Trump administration unwilling even to acknowledge the risks posed by climate change – including increased migration – we may actually be moving away from a solution.
There is a broad consensus among economists that long-term growth can be secure only if it is both sustainable and inclusive. In other words, if the world economy is to perform at potential – which can mean growth rates of, say, 2.5-3% in the US and Europe, together with 5-6% growth in the emerging economies – we need to reverse some of today’s most powerful trends.
On inequality, success will require stronger and more flexible labor markets. To this end, we need to develop education systems that provide the digital and civic skills that a twenty-first-century labor market demands. We also need to introduce modern and sustainable social-welfare systems, including fully portable benefits. And we need to implement strategies for managing migration.
As for climate change, we need a global system of implicit or explicit carbon pricing, spearheaded by the world economy’s most influential actors. In line with the December 2015 Paris climate agreement, the range of carbon pricing should take into account, to some extent, historical responsibilities, as well as current income levels.
There is one more prerequisite for sustainable growth: relative peace and security. This demands a strong international governance framework in which conflicts are resolved by negotiation and compromise, though strong defenses – both traditional and non-traditional (for example, cyber security) – will also have an important role to play in guarding against major threats.
Here, updating multilateral institutions, which have long played an important stabilizing role, will be crucial. That means resisting the trend, which has lately gained momentum, toward bypassing these institutions in favor of bilateral or regional arrangements. More fundamentally, it means rejecting old-style nationalism, which threatens to drag us back to the 1930s, rather than preparing us for the 2030s.
None of this is to say that the 2017 projections for GDP growth will be proved wrong. On the contrary, it is possible that the world will experience even-faster-than-expected growth this year, with growth forecasts being revised upward again this summer. But these gains are likely to be short-lived, unless policymakers seize the opportunity that they provide to address the deep-seated structural challenges that, if left unresolved, will undermine growth in the longer term.

The Economy’s Confidence Game

High levels of confidence don’t jibe with a slow-growing U.S. economy. That can’t last.

By Justin Lahart

In the months since President Donald Trump was elected, consumer and business confidence have soared, but the economy has slowed. The split has rarely been so stark and, while optimists have been hoping the economy will soon catch up with sentiment, it is looking more likely that sentiment will roll over.

Following a string of weak sales, spending and production data, economists have cut their expectations of economic growth for the first quarter. Forecasters polled by Macroeconomic Advisers now expect Friday’s gross domestic product report will show the economy grew at a 0.9% annual rate in the first quarter. At the start of the year, they had penciled in growth of 2.1%.

Some of the apparent weakness in GDP is likely due to quirks in the data caused by factors such as unusual winter weather and a swing in business inventories. Still, the divergence between “hard data”—tangible measures such as car sales—and “soft data,” such as confidence and other survey-based measures, is unusual. Research firm Cornerstone Macro calculates that the confidence data would normally imply GDP growth of about 5%.

The bullish case is that newly optimistic consumers and business owners will soon start spending, boosting economic data. This is generally what happens when the economy is coming out of recession, with the hard data following the soft data higher.

But the economy isn’t coming out of a recession—the last one ended nearly eight years ago. Instead, the country has experienced a long period of rising employment and disappointing but steady growth. The pent-up demand that exists in the aftermath of a downturn isn’t there. And the mere possibility of lower taxes and faster growth hasn’t changed the caution that consumers and businesses learned since the financial crisis.

The clock is ticking says Bank of the West economist Scott Anderson. Historically, when the hard data doesn’t pick up within a month or two of the move higher in the soft data, the soft data tends to tumble.

There are signs the souring in the soft data has begun. Last week, regional manufacturing surveys from the Federal Reserve Banks of Philadelphia and New York registered slowing activity. So did U.S. private-sector surveys conducted by Markit.

Barring proof that the White House and Republican-controlled Congress are about to deliver on tax cuts and stimulus, investors would be better off expecting the economy Mr. Trump inherited rather than the one he has promised.


Markets worry more about political turmoil than autocracy

The response to Turkey’s referendum result is the latest example

THE VICTORY of Recep Tayyip Erdogan, Turkey’s president, in a referendum on April 16th is seen by many observers as a worrying step on the road to autocracy. The vote handed Mr Erdogan far-reaching new powers. But the Turkish lira, government bonds and stockmarket all gained ground as the results came in.

It was a reminder that the relationship between markets and democracy is not rock-solid. Like an errant husband, investors may proclaim their fidelity to democracy but are not averse to seeing someone else on the side.

In Turkey investors may have feared turmoil if Mr Erdogan’s proposal had been defeated. It is an old, but fairly reliable, rule that investors dislike uncertainty. And the early years of Mr Erdogan’s tenure, when he was seen as a liberalising democrat, saw rapid economic growth; his transformation into an emerging autocrat has not put investors off. Since he took office, the Istanbul market has gained 760% (see chart).

An authoritarian government can provide certainty, at least in the short term. In 1922, when Mussolini took power in Italy, its equity market returned 29% and its government bonds 18%, according to Mike Staunton of the London Business School. Hitler’s accession in 1933 saw German shares return 14% and bonds 15%. True, Wall Street did even better that year under Franklin Roosevelt but still—even then, Hitler was clearly a dangerous extremist.

The world’s most developed economies tend to be democracies, and to be more open to trade and foreign investment. But as China has demonstrated, it is certainly possible to generate rapid economic growth without a democratic system. China’s stockmarket (along with Hong Kong’s) has been among the best-performing bourses this millennium.

Go back in time 100 years and investors would have been pretty suspicious of democratic governments. The pre-1914 world was dominated by governments with restricted voter franchises, in which currencies were tied to the gold standard, in part to protect the creditor classes from the ravages of inflation. The arrival of mass democracy after 1918 was followed by a boom in the 1920s but then by the Depression, stockmarket collapse and abandonment of the gold standard.

Democracies can enact policies that are not market-friendly; the interests of ordinary voters and international investors are not always aligned. If voters support trade tariffs, nationalisation or higher taxes on firms and top earners, then both stockmarkets and currencies are likely to suffer.

The great bull market of the 1980s and 1990s, on the other hand, coincided with political moves to reduce regulations, lower taxes and let capital flow freely across borders. After the fall of the Berlin Wall, many former Communist countries privatised state-owned companies and opened domestic stockmarkets. In many countries, investors could be relatively relaxed about which party took office; economic reforms were pushed through by Bill Clinton, Gerhard Schröder and Tony Blair, all politicians from the centre-left.

But the background has changed again. There are remarkable similarities between the election in America and the referendums in Britain and Turkey. In all three, the electorate was bitterly divided and the margin of victory was narrow (Donald Trump lost the popular vote but won the electoral college). In all three, the victorious side drew its support from rural areas and small towns, and was opposed by voters in the big cities. And in all three cases, it has ignored the narrowness of the majority and has argued it has a mandate for radical policy change.

Democracies work best when there is a modicum of consensus and voters are willing to accept defeat for their own side as legitimate. But that is harder when the ideological divisions are sharp and electoral systems produce “winner takes all” results. In France, for example, voters may yet be faced with a choice in the second round between a candidate from the extreme right and one from the extreme left.

This is likely to result in more radical political changes, of the type that markets do find unsettling.

The general drift is towards more authoritarian, more nationalistic policies that appeal to voters whose living standards have stagnated. That process can create a chain reaction; nationalist policies in one country can provoke an adverse reaction in its neighbours and trading partners. Investors may believe that some of these authoritarian leaders will deliver policies they like in the short run—tax cuts, for example. But in the long run, this is a development that ought to concern them greatly.