Charts of interest

December 27, 2015

The following charts are discussed in an email sent to TSI subscribers on 27th December.

1) The HUI/gold ratio

HUI_gold_271215

2) The Gold Miners ETF (GDX) — down by 22% year-to-date (YTD)

GDX_271215

3) Junior Gold Miners ETF (GDXJ) — down by 16% YTD

GDXJ_271215

4) Almaden Minerals (AAU) — down by about 30% YTD but up by about 30% over the past 4 weeks

AAU_271215

5) Endeavour Mining (EDV.TO) — up by about 90% YTD and at a 12-month high

EDV_271215

6) Evolution Mining (EVN.AX) — up by 125% YTD

EVN_271215

7) McEwen Mining (MUX) — roughly flat YTD in US$ terms, but up by almost 20% in C$ terms

MUX_271215

8) Premier Gold (PG.TO) — up by about 40% YTD

PG_271215

9) Royal Gold (RGLD) — down by 37% YTD. The early-November plunge to the mid-$30s caused RGLD to offer reasonable value — and caused us to become interested in having exposure to this stock — for the first time in several years.

RGLD_271215

10) Ramelius Resources (RMS.AX) — up 300% YTD

RMS_271215

11) Sabina Gold and Silver (SBB.TO) — up by about 110% YTD

SBB_271215

12) Emerging Markets Equity ETF (EEM) with 12-week moving average — intermediate-term ‘oversold’ and at an 11-year low relative to the S&P500, but very high relative to commodities and potentially ‘on the edge of a cliff’.

EEM_weekly_271215

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Falling Dominoes

December 16, 2015

The decline in house prices that began in 2006 wasn’t the cause of the 2007-2009 economic bust. The cause was widespread mal-investment resulting from monetary inflation and the Fed’s interest-rate manipulation. However, the 2006 reversal in house prices set off a series of falling economic dominoes due to the fact that the housing market was where a disproportionately large amount of the mal-investment and associated debt happened to be. The reason for mentioning this is that the 2014 downward price reversal in the oil market might have played the same role as the 2006 downward reversal in the housing market, because this time around a disproportionately large amount of the mal-investment and associated debt happened to be linked directly or indirectly to the booming oil industry.

A lot of high-yield debt was linked both directly and indirectly to the booming US oil industry, which is why proxies for the US high-yield bond market reversed downward at almost the same time as the oil price in mid-2014. With ETFs such as JNK (the Barclays High Yield Bond Fund) and HYG (the iShares High Yield Bond Fund) having made new 6-year daily-closing lows on Monday 14th December there is little doubt that the US high-yield corporate bond market is immersed in a cyclical bearish trend. In effect, the falling of the oil domino knocked down the high-yield bond-market domino.

Another of the dominoes to fall in reaction to the oil reversal is the railroad industry. The railroad business boomed due to a large increase in the demand for rail cars to carry oil from the oil-fields and supplies to the oil-fields. In this case the reaction was delayed, as it wasn’t until late last year that investors began to connect the dots. Last week the Dow Jones US Railroad Index (DJUSRR) made a new 2-year low and is clearly immersed in a cyclical bear market.

The following chart provides a visual representation of the falling dominoes discussed above. Notice that HYG (the blue line), an ETF proxy for high-yield bonds, began to fall almost immediately after the oil price (the black line) turned down, whereas DJUSRR (the green line) trended upward for an additional 5 months before toppling over.

DJUSRR_HYG_oil_151215

There’s a high risk that economic dominoes will continue to fall until there are none left standing, but be warned that it could be a very drawn-out process. During the preceding cycle there was a 2-year gap from the reversal in the housing market to a general capitulation, and this time around the monetary backdrop is more bullish.

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Unintended Consequences

December 14, 2015

This post is an excerpt from a commentary posted at TSI about two months ago.

Whenever the government intervenes in the economy in order to bring about what it deems to be a more beneficial outcome than would have occurred in the absence of intervention, there will be winners and losers but the overall economy will invariably end up being worse off. Moreover, it is not uncommon for one of the long-term results of the intervention to be the diametric opposite of the intended result.

A great example of the actual result of government intervention being the opposite of the intended result is contained in a chart that formed part of a recent article at ZeroHedge.com. The chart, which is displayed below, shows the home ownership rate in the US.

Here, in brief, is the story behind the above chart.

During the Clinton (1993-2000) and Bush (2001-2008) administrations the US Federal Government decided that it would be beneficial if a larger number and a broader range of people were home-owners. The government therefore began making a concerted effort to not only increase the US home-ownership rate, but also to make home loans easier to obtain for less-qualified buyers.

This was achieved in part by the more aggressive implementation, beginning in 1993, of the Community Reinvestment Act (CRA) of 1977. Under the cover of the CRA, banks were forced to reduce their lending standards for lower-income groups in general and ‘minorities’ in particular. For example, government regulations created during the 1990s set bank loan-approval criteria and quotas with the aim of increasing loan quantities, and even went so far as to require the use of “innovative or flexible” lending practices to address the credit needs of low-and-moderate-income (LMI) borrowers. Of course, banks that are forced by the government to lower their standards when assessing the loan applications of less-qualified borrowers must also lower their standards for other borrowers, because they can’t reasonably approve an application from one customer and then reject an application from a better-qualified customer.

An increase in the home-ownership rate was also achieved by assigning an “affordable housing mission” to the government-sponsored enterprises (Fannie Mae and Freddie Mac). To make it possible for Fannie and Freddie to achieve this mission their automated underwriting systems were modified to accept loans with characteristics that would previously have been rejected. In addition, Fannie and Freddie cited the new “mission” as a reason that their mortgage portfolios should not be constrained.

At this point we would be remiss not to mention the helping hand provided by the Fed. Without the Fed’s aggressive money-pumping and lowering of interest rates during 2001-2003 there would have been less credit and less money available to the buyers of homes. The Fed’s actions ensured that there would be a credit bubble, while the government’s actions ensured that the residential housing market would be the focal point of the bubble.

The above chart shows that the government was initially — and predictably — successful in its endeavours. The home-ownership rate sky-rocketed as it became possible for almost anyone to borrow money to buy a house. The chart also shows that the home-ownership rate has since collapsed to its lowest level since the 1960s. This collapse was a natural consequence of the credit bubble, in that household balance-sheets were drastically weakened by the taking-on of debt-based leverage during the bubble and the post-bubble plunge in asset prices.

The bottom line is that the interventions designed to increase home ownership ultimately contributed to the home-ownership rate falling to the point where it is now at a multi-generational low. Not just an unintended consequence, but the opposite of the intended consequence.

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The ridiculous and relentless fuss over the COMEX gold inventory

December 11, 2015

I’ve often been impressed by the ability of gold-focused bloggers, newsletter writers and journalists to turn a blind eye to the gold market’s genuine fundamentals and to fixate on factors that either have no bearing on the gold price or amount to unadulterated hogwash. Depending on how they are presented, the stories that are regularly told about the COMEX gold inventory and its relationship to the gold price can fall into either the irrelevant category or the hogwash category.

I’ve mentioned numerous times in the past, including in an 18th August blog post, that the amount of gold in COMEX warehouses and the inventories of gold ETFs follow the major price trend, meaning that changes in these high-profile inventories are effects, not causes, of major changes in the gold price. That’s the long-term relationship. On a short-term basis there is no consistent relationship between inventory levels and the gold price.

There is therefore nothing strange about the fact that the post-2011 bear market in gold has been accompanied by an overall decline in COMEX and gold ETF inventories, just as there was nothing strange about the overall rise in COMEX and gold ETF inventories during the preceding bull market.

I’ve also briefly pointed out in the past that the large rise in the ratio of COMEX “registered” gold to COMEX gold open interest in no way indicates a shortage of physical gold or that a COMEX delivery problem is brewing.

Various sites have been presenting the aforementioned ratio for years as if it were a dramatic, price-impacting development. A recent example is the ZeroHedge article posted HERE, which contains the following chart. This chart certainly creates the impression that something is horribly wrong. A more distant example is the JSMineset article posted HERE, which is from July-2013 and forecasts a COMEX crisis within 90 days due to the critical shortage of deliverable gold.

Fortunately, early this week a logical and well-informed article on the topic was posted HERE. You should read the full article as long as you are willing to let facts get in the way of a good story, but two of the key points are:

1) The amount of “registered” gold is NOT the total amount of gold available for delivery.

2) Although it’s unlikely to give you any meaningful information, if you really want to spend time comparing open interest and physical gold inventory then it’s only the open interest in the current delivery month that matters.

It’s hard enough to figure-out the gold market when considering only the true fundamentals. There’s no need to further muddy the waters by introducing spurious information, unless the goal is to draw readers with exciting stories rather than to be accurate.

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