This post is a modified excerpt from a recent TSI report.

A point I’ve made many times in TSI commentaries over the years is that the major trends in gold’s relative value have nothing to do with what most people think of as “inflation” (a rising CPI). They are, instead, driven by shifts in how the financial establishment (the central bank plus the commercial banks) is perceived and by shifts in the perception of economic growth prospects. In more general terms, they are driven by shifts in confidence. There are times when a substantial decline in confidence is related to rising inflation expectations, but in developed economies there are more times when it isn’t. And even when it is, it’s not really the decline or the expected decline in the purchasing power of money that results in a greater desire to own gold; it’s the belief* that the stewards of the monetary system are losing control.

The happenings of the past three months constitute an excellent example. Inflation expectations were low when gold began to turn upward in December and if anything are even lower now, but over the past several weeks we had a very fast rally in the real gold price. It should be clear to any knowledgeable observer that the rally had absolutely nothing to do with fear of “CPI inflation”. Rather, it was driven by the combination of fear that the economically-destructive insanity known as Negative Interest-Rate Policy (NIRP) will spread to the US and fear of banking collapse in Europe.

Everything that the world’s most important central banks are doing is based on logical conclusions drawn from false premises. The false premise upon which interest-rate suppression is based is that economic growth is caused by borrowing and consumption. The reality is that saving is the foundation of sustainable economic growth. By pursuing policies that punish saving and reward borrowing, central banks set the scene for slower economic progress.

Now, progress-hindering monetary policy is not something new. It has been the order of the day for a very long time, but it has never before been taken to such extremes. Moreover, senior central bankers are making it crystal clear that they are not close to being done — that they are ready and willing to continue along the current path if the relentless beatings fail to lift morale — even though it is becoming more obvious by the day that the unconventional monetary policies have hurt far more than helped.

The upshot is that today’s central bankers are completely stupid, where stupid is defined as having an unwitting tendency towards self destruction**. Unfortunately, due to their immense power these men and women are taking entire economies along for the ride. The gradual dawning that this is happening is why gold is getting more popular.

*Central banks and governments never had genuine control, but there has been widespread BELIEF over the past several years in the abilities of central banks to create stronger economies.

**The Doug Casey definition.

This blog post is a modified excerpt from a 17th February TSI commentary.

I don’t need to read/watch the news to know that the supply-demand backdrop remains unsupportive for the oil price. All I have to do is look at the spread between spot prices and futures prices in the oil market. The larger the contango, that is, the higher the futures price relative to the spot price, the more abundant the current supply and the less price-supportive the so-called ‘fundamentals’.

As recently as a few days ago, oil for delivery in July-2016 was $6.40/barrel, or about 20%, more expensive than oil for immediate delivery onto the cash market. This was very unusual. It meant that if someone could buy physical oil and store it cheaply they could make a risk-free annualised return of almost 40% by simultaneously selling July futures contracts. The reason that every man and his dog was not eager to do this trade is that the cost of storing oil is now so high that even a contango that represents a potential 40% annualised return on a physical-futures arbitrage is not very profitable. And the reason that the cost of storing oil is now so high is that there is a much-greater-than-normal amount of oil already in storage.

Unfortunately, knowing that there is an oil glut and, therefore, that the ‘fundamentals’ remain bearish doesn’t tell us what will happen to the oil price in the future. This is because the bearish fundamentals are very well known and are factored into the current price. It is also because the fundamentals are always bearish at major price bottoms in commodities markets.

I suspect that the oil price is now close to a major bottom. This is because at its recent low the “inflation”-adjusted oil price was below its 1986 bottom and almost as low as its 1998 bottom (the two lowest points of the past 40 years). It is also because if stock markets have made long-term peaks then the commodities markets are likely to be among the main beneficiaries of future monetary inflation.

However, it’s very unlikely that there will be a ‘V’ bottom in the oil market. Considering the short-term positive correlation between the oil price and the S&P500 Index (see chart below) and the well-known bearish fundamentals, it’s more likely that the oil market will build a base this year involving a Q1 bottom and one or two successful tests of the bottom.

In an old joke, a policeman sees a drunk searching for something under a streetlight and asks what he has lost. The drunk says that he lost his keys, and they both start looking under the streetlight together. After a few minutes the policeman asks the drunk if he is sure he lost them here, and the drunk replies, “no, I lost them in the alley”. The policeman then says “so why are you looking here?”, and the drunk replies, “because this is where the light is”. This joke led to the name “Streetlight Effect” being given to a psychological tendency for people to look for clues where it is easiest. Many gold-market analysts have obviously succumbed to this psychological tendency.

It is obvious that many gold-market analysts have succumbed to the “Streetlight Effect” because they fixate on a tiny fraction of the overall gold supply and they do so because this tiny fraction of the overall supply is where the well-defined numbers are. The rest of the supply, which probably accounts for at least 90% of the total, is ignored because its location can’t be pinpointed and its size can’t be accurately measured. In effect, due to a lack of definitive data they make the assumption that the bulk of the world’s gold supply doesn’t exist. No wonder their supply-demand analyses don’t make sense.

To be more specific, there are many gold-market analysts who focus on the amount of gold produced by the mining industry, the amount of gold in COMEX warehouses, the publicly-reported warehouse stocks in London and the bullion inventories of gold ETFs, as if the sum of these quantities was a reasonable estimate of the world’s total amount of gold in saleable form. This is a huge mistake. Furthermore, they assume that once gold leaves a warehouse for which there are publicly-reported numbers the gold effectively ceases to exist, as if it has evaporated into the air. However, it is far more reasonable to assume that almost every ounce of gold that leaves a publicly-reported inventory remains part of the total supply.

In any case and as I explained last week, even if the “Streetlight Effect” didn’t apply and the location of every ounce of aboveground gold was known, the information wouldn’t tell us anything about the price and therefore wouldn’t be useful from an investing/speculating perspective.

This blog post is a modified excerpt from a recent TSI newsletter.

One of the bullish arguments on the US economy and stock market involves pointing out that a) the yield curve hasn’t yet signaled a recession, and b) the historical record indicates that recessions don’t happen until after the yield curve gives a warning signal. This line of argument arrives at the right conclusion for the wrong reasons.

The bullish argument being made is that every recession of the past umpteen decades has been preceded by an inverted yield curve (indicated by the 10-year T-Note yield dropping below the 2-year T-Note yield). The following chart shows that while the yield curve has ‘flattened’ (the 10yr-2yr spread has decreased) to a significant degree it is still a long way from becoming inverted (the yield spread is still well above zero), which supposedly implies that the US economy is not yet close to entering a recession.

The problem with the argument outlined above is that it doesn’t take into account the unprecedented monetary backdrop. In particular, it doesn’t take into account that as long as the Fed keeps a giant foot on short-term interest rates it will be virtually impossible for the yield curve to invert. It should be obvious — although to many pundits it apparently isn’t — that the Fed can’t hold off a recession indefinitely by distorting the economy’s most important price signal (the price of credit), that is, by taking actions that undermine the economy.

The logic underpinning the bullish argument is therefore wrong, but it’s still correct to say that the yield curve hasn’t yet signaled a recession. The reason is that an inversion of the yield curve has NEVER been a recession signal; the genuine recession signal has always been the reversal in the curve from ‘flattening’ (long-term interest rates falling relative to short-term interest rates) to ‘steepening’ (long-term interest rates rising relative to short-term interest rates) after an extreme is reached. It just so happens that under more normal monetary conditions, an extreme isn’t reached and the reversal therefore doesn’t occur until after the yield curve becomes inverted.

This time around the reversal will almost certainly happen well before the yield curve becomes inverted, but it hasn’t happened yet.