Unemployment: Getting Worse in Europe

Today, the unemployment number for Italy was released at 11.1% in October 2012. The number is very big, but the slope at which the unemployment is increasing in Italy is even more concerning. See Chart 1.

It is not getting better in Europe, only worse. Also France and the Netherlands are doing worse and worse.

Our country Belgium is actually doing very well as is Germany.

Chart 1: PIGS Unemployment

Gold Lease Rate: Trend is a little concerning

The sudden drop in lease rate is a bit concerning...

Chart 1: Gold Lease Rate

Brink's Another 1 million ounces physical silver gone

Stock at the COMEX isn't so significant, but it does get a little trend going.

The Brink's vault had another 1 million troy ounces of physical silver taken out yesterday. More and more evidence of people going for the physical thing.

Chart 1: Silver Stock CME

Dow Gold Ratio closing down

A little reminder on the Dow-gold ratio (Chart 1). We see that the Dow has underperformed gold recently. And it looks like the trend could keep going down, which is consistent with my bullish view on precious metals.

Chart 1: Dow Gold Ratio

Also very consistent with my bullish view on silver, we see the gold silver ratio (Chart 2) go down as well. It's strikingly similar with the Dow-gold ratio.

Chart 2: Gold Silver Ratio

And finally, we see that platinum hasn't had its rise yet against gold. So buying platinum is still a very good deal (Chart 3).

Chart 3: Platinum Gold Ratio

Why are the silver lease rates flat at Kitco?

At last we know the reason why the lease rates for silver were flat for so long (and still are). James Turk told us just recently that the LBMA (London Bullion Market Association) is no longer reporting silver interest rates and silver forward rates.

As you know, the lease rate is LIBOR minus GOFO and the same applies for silver. If they don't report the silver forward rates, you can't get the lease rate anymore, because we lost a parameter of the equation. James Turk says that the LBMA is underreporting on the silver forward rate. It's reporting contango, but actually it should be in backwardation. When gold and silver are in backwardation, that means we will have high probability of getting inflation.

That's what I'm making of this, unless there is someone who can give another explanation for the flat curve here:

Chart 1: Silver Lease Rate

Luckily, we still have the gold GOFO and gold lease rates. The GOFO is still in contango (3 month GOFO = 0.42%). So we just use those to "assume" silver forward rate ... If we do get a spike down in GOFO, then severe backwardation could show up.

One thing is certain. If gold lease rates go up, the GOFO goes down and that means the gold goes in backwardation. And that also means that silver is going in backwardation. That ultimately means that you should buy silver when silver lease rates go up.

If this event of the LBMA isn't a reason to buy silver, I don't know what is.

And finally, isn't it a coincidence that the silver priced started to move up just when the curve went flat (Chart 1)?

Marc Faber Interview

Interesting interview for your "tea" time.

Ellis Martin Report with Peter Schiff

Everyone knows the Ellis Martin Report which focuses mainly on resource companies, but this is the first time I have seen them with Peter Schiff.

Stocks will underperform

I found a very good macroeconomic site named Eureka Report (Kohler's Graphs) which basically monitors global economic trends. I couldn't resist to show one of them here.

As I pointed before, equities have outperformed many other assets the last months and this can also be seen on Chart 1. There is a correlation between equity prices and the earnings per share revisions. The last couple of months we saw a decoupling between the two. 

It is my prediction that global equities will therefore continue to underperform other assets in the coming months.

Chart 1: Equities Vs. EPS (Kohler's Graphs)

Copper Contango and How to Use it to Your Advantage

After several data points about copper contango (red dots) and copper price (blue dots) I'm beginning to think that these two curves always go opposite ways.

So how do we use these charts to our advantage? I think this: when the red dots go up high (steep contango), it means a bottom should be forming on the copper price (e.g. June 2012 and today). That means the copper price should go up in the future from now. When the red dots are very low (steep backwardation) (e.g. May 2012) you will know that the copper price will go down.

There is science behind this, but we don't need to think about that, we just use correlations to make investment decisions. 

That also means, if copper goes up, the stock market will go up. How odd that may sound...

Chart 1: Copper Contango

Drop of 1 million physical ounces of silver COMEX

Another nice data point. I reported a while ago that 3.6 million troy ounces were taken out of COMEX.

Now, a month later we see another 1 million troy ounces taken out from Scotia Mocatta depository.

It is getting more and more interesting... why are they pulling out their physical silver I wonder (Chart 1).

Chart 1: Silver Stock COMEX

On the other hand, nothing special to report at the gold stock (Chart 2).

Chart 2: Gold Stock COMEX

Peter Schiff's Official Gold Blog

Peter launched his official gold blog a while ago, but I never noticed...:
http://blog.europacmetals.com/

I put it in the feed section to the right. Can't miss any of this news...

Bullish on Precious Metals

One very good indicator for higher precious metals prices is the lease rate.

As I predicted here, it was time to buy gold and silver. And now it's completely obvious that they will do good as lease rates are steadily increasing. I doubled my position in silver.

Chart 1: Gold Lease Rates

I wish I could show the silver lease rates, but Kitco is cheating on us, their chart only shows a flat line...

Chart 2: Silver Lease Rates (flat lines since 2 November 2012)

But all we need is the gold lease rate and then just extrapolate it to silver lease rates.

Yet another day of decoupling

Today is another day of decoupling:

USD/EUR: -0.2%

U.S. bonds: -2%

Stocks: -0.5%

It's getting more obvious day by day.

Chart 1: Monitoring of Decoupling

Intermezzo:
I also got news from our Belgian government today that wages will be frozen for 2 years and minimum wages would go up by 150 dollars/month.

This will have impact:
1) minimum wage earners will get fired
2) efficiency at work will go down because there is no reason to work hard with frozen wages
3) people will search for another job to get higher wages

We have the worst government ever...

China Electricity Production Inches Up

If you recall my article about China and its real growth rate. Well, there is light at the end of the tunnel.

China finally has an upward move in electricity production, which is basically good for commodities. Let's see if this trend keeps going up.

Chart 1: China Electricity Production

Foreign Investors Continue to Buy U.S. Treasuries

It is expected: foreigners continued to increase their positions in U.S. treasuries. Foreign holdings of U.S. debt hit $5.46 trillion from $5.292 trillion the previous quarter (Chart 1). That's an increase of 3%.

$16.28 trillion in debt is now partly in the hands of foreigners. The percentage = 5.46/16.28 =  33.5% (Chart 2).

As long as foreigners are willing to hold U.S. debt, there is no problem at all...

One word of caution though, the interest on this debt will be sucked out of the U.S. economy and go to the foreigners.

Chart 1: Federal Debt Held by Foreigners

Chart 2: Federal Debt Held by Foreigners

China increased their U.S. treasury holdings to $1.156 trillion in September 2012 (Chart 3).

Chart 3: China U.S. treasury holdings

Fiscal Cliff: Savings Rate to go into Negative Territory

The fiscal cliff which is right in front of us will arrive on January 1st, 2013. The most important change will be the expiration of the Bush tax cuts. Each citizen of the U.S. will have a tax hike starting next year. The result will be a decline in savings rate. Tax rate can be said to affect the savings inversely both in the personal and corporate levels. It means that in the cases when the tax rate increases, the rate of savings may fall while with decrease in the tax rate, the savings may increase.

Overall, the personal income tax rate will go up 3% with the exception of the lowest and highest income earners who will have a whopping 5% tax increase. This tax increase will therefore reduce the disposable income of each and every person and business in the U.S.

So what does this mean in simple numbers? If I earn 3000 dollars and I am taxed 33%, I will have 2000 dollars of disposable income. If I save only 3% of my disposable income (see chart 1). I am saving 60 dollars. If now the taxes on my personal income go up 3%, I will need to hand over 90 dollars to the government. My disposable income will be 1910 dollars. This means I'm going underwater: 60-90 = -30.

Chart 1: Personal Savings Rate

Continue reading here.

Israel - Iran - Syria Escalating

As I guessed previously, Israel would start doing something soon. I said Israel could strike Iran, but instead they attacked Hamas (which is a close ally of Iran). After assassinating a top commander from Hamas, they bombarded the seaside strip and now bombarded the Hamas headquarters with it.

Of course this is an act of war and I see this relationship between Israel and Iran soon escalating in a bad way as pointed out here. We already see that this war could spill over to Iran. There are many reasons for this.

We'll see what happens next. If defense spending goes up significantly you'll know what to do with commodities.

Capacity Utilization Flat for the Month of October 2012: Mining Industry has Bright Future

The capacity utilization rate was basically flat at 77.8% for the month of October 2012. Due to hurricane "Sandy", it is estimated that total output dropped 1%, resulting in a lower capacity utilization compared to the capacity utilization rate of 78.2% the previous month.

There is one positive area though and that's the mining sector. The capacity utilization rate in the mining industry increased to a 4 year high of 90.4. This is 3.1% above its historical average.

To see what this means go here.

In an interview with David Morgan this week we noticed that the silver mining supply wouldn't be able to keep up with the demand in the coming years. He forecasts that we will come into a silver deficit starting from the year 2014.

Soros Bullish on Gold and Mining

As we noted today, George Soros is still adding to his position of GLD. That should be a positive for precious metals. What is very interesting is that he also added to the mining companies in the steel industry. It could be bullish for anything that has to do with iron ore and coal, this corresponds with my bullish case on Cliffs Natural Resources (CLF) as I noted here.

This sector is still very sluggish, but Soros could be looking at value buying here.

Another day of decoupling

Lately, we didn't see much of a decoupling, but today we have another day of decoupling.

Stocks went down 0.5% with the S&P going to 1368.
The dollar went down 0.32% to 1.2743.
10 year bonds went down 0.42% to 1.6012.

Only thing going up is oil, gold and silver.

Peter Schiff talking about Fiscal Cliff and Decoupling

When you speak of the devil... After several days of my publication of the decoupling theory, Peter Schiff put up a video talking about the fiscal cliff and about the decoupling of the Asian and Western economies.

Always a great report to follow.

Sprott Silver at it Again

Sprott Silver is at it again. They announced that they will make another offering to buy physical silver. Luckily, the premium on silver is only 4% at this time, so we can't fall much further in premium.

http://sprottphysicalsilvertrust.mediaroom.com/index.php?s=14805&item=128178

What it does do is contribute to the explosion in the silver market eventually.

Short Bonds Now!

As the fiscal cliff is nearing with the end of the year 2012 in sight and total public debt skyrocketing to the debt limit of $16.4 trillion, investors need to seriously start worrying about the U.S. bond market.

Technically, the bond yields on the 10 year treasury notes are bottoming out. We could see bond yields rising and bond prices collapsing. Just recently Jim Rogers disclosed that he is short U.S. bonds. Aside from the rising debt and the fiscal cliff we should note first that 30 year fixed mortgage rates have hit a new high of 3.5% and are on average at 3.4%. As bond yields follow the mortgage rates closely I expect bond yields to go up too.

Chart 1: 10 year U.S. bond yield

Further evidence of a coming bear market in U.S. bonds can be found on the open interest front. Historically, when commercials are net short the bonds, bond prices will show weakness going further. This can be seen on Chart 1 versus Chart 2. When the bond yields go down on Chart 1, the net open interest will tend to go to the short side (red curve goes downwards on Chart 2). At the same time, when bond yields go up, the net open interest will go to the long side or upwards. The only time this correlation didn't add up was during the economic crisis of 2008 where bond yields were artificially suppressed. 

To see what more evidence I have, go here.

Positive Numbers on China's Gold Imports from Hong Kong

Finally we have some good news for gold, which also triggered a massive rise in the gold price today.

China imported 69.71 metric tonnes of gold in the month of September 2012, which is a 30% rise.

Chart 1: China Gold Imports from Hong Kong

Net exports from Hong Kong to China were 13% lower on the year, which means they are at 42 metric tonnes as net exports a year ago were 50 metric tonnes.

If we compare this 42 metric tonnes net exports to the 69.71 metric tonnes of gross exports from Hong Kong to China, we have a ratio of 60%, which is actually a pretty good number. It means China is really taking almost all the gold and exporting a little bit of gold back to Hong Kong.

Chart 2: Net Exports of Gold from HK to China

Engelhard Silver Bullion Premium to Spot Silver

With the current suppression of silver I think it's time to monitor the premium to see if a real shortage is actually building up.

Some analysts are saying the premium on silver could start going up. Let's see if it really does.

One of the best ways is to use the Engelhard bullion price, which can be found here:

http://apps.catalysts.basf.com/apps/eibprices/mp/

Table 1: Engelhard Industrial Bullion Prices

I have subtracted the Engelhard silver bullion price by the spot silver price and then divided the result by the spot silver price to get a percentage. I have bad news. The premium is trending down. This means there isn't really a problem with supply or any sign of decoupling.

Chart 1: Silver Premium Engelhard bullion to spot silver

If there were a problem with supply or a decoupling between physical and paper silver, the chart would be more like this:

Chart 2: Spot Silver Premium

I'll continue monitoring this so that investors can have the breaking news when the premium starts going up.

Barrick Gold: Abysmal Earnings

As noted before in this article, production costs of mining gold are rising much faster than the price of gold. Previously we saw Kinross Gold having trouble getting their acquired asset from Redback Mining into construction/production due to rising capex and production costs. This time it's Barrick Gold who is stating the same.

The net earnings in Q3 2012 plunged in half from the previous year, making Barrick Gold's earnings P/E ratio go over 10. They revised twice their estimates of capex for their mine at Pascua-Lama, which is pretty unprofessional if you ask me. This tells me that costs of production are rising very rapidly.

In the case of Barrick Gold, the point is that production costs have risen to $592/ounce of gold in 2012, while it was $453/ounce of gold in 2011. That's an increase of 32% in just 1 year.

The gold price was $1600/ounce in 2011 and is $1730/ounce in 2012. That's only an increase of 8%.

This means that gold has to at least rise to $2100/ounce or in other words rise another 20% from this level to even match the inflation costs of production from mining the gold.

I expect that this rise in gold will indeed happen as mining will become more and more difficult at this rate.

Today New Gold will be releasing their earnings, I hope they do better as I have an interest in them...