Silver premiums push higher

I can't make charts yet as I'm in Hong Kong, but I do know that Shanghai silver premiums have now hit 17%, which means that silver in London can now be transported to China for a profit, including the 17% tax. Very important now to watch SLV to see what happens there. If GLD can be raided, which is in progress at this very moment, why can't SLV be raided?

On another note I see that physical silver is getting high demand now. Look at the Sprott physical silver trust premium, which recorded a new high for the year. The probability of Eric Sprott making a silver offering has increased, especially now when silver is scarce and in deficit, especially in Shanghai.

First Majestic Silver Decreases Silver Premium For First Time In A Year

First Majestic Silver, after one year of waiting, has finally thrown in the towel and dropped their silver prices from $23/ounce to $20/ounce, a 13% drop. I wonder if this has anything to do with the end of QE announcement last night...

This is also not consistent with what they said a few weeks ago, namely betting on a higher silver price in the fourth quarter, thus retaining a large amount of their silver inventory stock for the sake of selling it at a higher price in the future.

In fact, a week ago the CEO encouraged other silver miners to halt their silver sales, how will lower premiums accomplish that goal?

Peter Schiff on CNBC

Posting video like a true Peter Schiff fan.

Correlation: leading Vs. coincident Vs. lagging indicator

The FRED site gives leading indicators for the U.S. When we compare that indicator to the coincident indicator we do see that there is a lag. This is consistent with the definition of coincident and leading indicators.

A coincident indicator gives the status on current economic data points in the present. These include indicators like the inflation rate. A leading indicator gives a prediction on future economic activity. For example bond yields.

This is why the coincident indicator always lags the leading indicator. See chart above.. We also have lagging indicators like the unemployment rate. Moreover, when we compare the coincident and lagging indicator with each other, we have a leading indicator. Because tops in the stock market often happen when the coincident indicator rises slower than the lagging indicator. The recession will be on the horizon as the ratio of coincident to lagging indicator falls.

 

The weekly economic index gives a better view of the economy in real time on a weekly basis.

S&P revenue can be predicted via the OECD leading indicator. 

Profits before tax as a percentage of GDP is a leading indicator for the stock market.

The Sahm Rule Recession indicator is based on the U3 unemployment numbers and can be a gauge to see if we're nearing a recession.

Another recession indicator is the McKelvey Rule.

Another recession indicator is the Mel Rule.

Finally, there is the Michaillat-Saez recession indicator.

Yardeni's forecast can be found here.

Yardeni S&P500 earnings can be found here.

Make sure to check the GDP outlook from the Atlanta Fed.

Correlation: gold per capita Vs. income per capita

Apparently, Indians and Chinese buy more gold when their wages go up and I'm pretty sure Chinese people will continue to see wage growth in the future. One reason in particular is that their currency will continue to appreciate. Another reason is that their government debt to GDP is very low. So businesses won't be taxed to death like in the Western world. Besides, they are creditor nations with a lot of foreign exchange reserves.

The WGC issued another report on gold here:
http://www.gold.org/download/file/3543/investment_commentary_looking_into_q4_2014.pdf

In there you can see the correlation between income and gold net worth per capita. The more you earn, the more gold you buy, and the funny thing is that it's exponential. So rich people put more money in gold than poor people. You would expect that the curve were linear. Probably poor people have more basic needs...

Day 4-7: The Almighty Lion Dance

The main event in Hong Kong was the da jiao festival (太平清醮). This event occurs every 10 years in Yun Long. It's a lion dance festival in super size to honor the ancestors.

Willem Middelkoop Seminar on Gold

A splendid seminar by Willem Middelkoop on gold. You can't understand a thing about it, but I sure can. Just follow the highlights that I'm going to summarize.

China purposely stopped buying U.S. bonds in 2010 and made a deal with the U.S. to buy up the important J.P. Morgan vault building in order to store its physical gold.

In 2012-2013 China started to buy U.S. bonds again probably because they made a deal to get cheap gold from the U.S. Willem estimates China has 3000 tonnes of gold now.

Willem says we are in a major bond bubble and advises you not to take part in bonds.

Plans are being made behind the screens to reset sovereign debt. Switzerland is actually the only country that hasn't ever defaulted on debt. When this reset comes, bonds will default. Pension funds are now heavily invested in bonds, so don't count on your retirement.

The SDR, a basket of currency reserve assets, will compete with the U.S. dollar. The composition of the SDR will probably start to include renminbi and ruble (today we have USD, JPY, GBP, euro). And of course gold, which the Chinese have a lot of.  It is very important to monitor the COFER at the IMF:
http://www.imf.org/external/np/sta/cofer/eng/
http://data.imf.org/?sk=E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4

Correlation: GLD holdings Vs. Total U.S. Gold ETF holdings

I did some research on the GLD gold trust physical holdings versus the Total U.S. gold backed ETF holdings and these are the numbers.

2014 sep
795 ton gld
1726 ton global

2013 dec
798 ton gld
1810 ton global

2012 dec
1351 ton gld
2690 ton global

2011 dec
1255 ton gld
2457 ton global

2010 dec
1281 ton gld
2146 ton global

2009 dec
1133 ton gld
1816 ton global

2008 dec
780 ton gld
1202 ton global

Day 3: Some more protesters

Sha Tin has a heritage museum for Bruce Lee, which we visited. All museums have free admission every Wednesday.

Then we went shopping in Mong Kok, I did come across some more protesters. Again evidence that all is well, they were very peaceful. I expected more excitement.

Day 2: Where are the maple leafs?

At Hang Seng Bank in Hong Kong, they used to sell Maple leaf gold coins. But when I asked for those, they said they weren't available. They only had Australian kangaroos from the Perth Mint.

What they also had are these weird 5 tael bars of 0.99 gold. That's around 7 ounces of gold. Gold bars with 1% impurity. They said I shouldn't buy those when taking them back to Belgium as they wouldn't recognize them as gold.

Later on I found out that there were delays of one month to get maple leafs, Perth mint sales and U.S. Mint sales are exploding.

Next on I went to a retail gold shop Luk Fook to look at what they have in store. When I went in, they shoved some golden rings under my nose and I quickly saw the premiums were in the 20%. Not exactly what I was looking for. But you can also buy 1 tael gold rings which have a normal premium of around 5%.

It's amazing how many gold shops there are in Hong Kong. Just walk along and you can buy gold anywhere you go.

Day 1: Wandering in Central Hong Kong

We're just walking through Central Hong Kong. I see nothing special on the streets. I have the feeling there aren't a lot of busses as I normally would expect. That's because all busses are diverted back when they reach the protester areas. I haven't seen it yet and actually don't plan to either.

Instead, I'm going to buy some physical gold while I'm here. Currently I'm sitting in the Bank of China tower for some business activities. The security here is pretty good. I need to hand over my identity card to get a visitor pass. There is also security screening when you are carrying any bags.

Yesterday, completely unrelated to economics, I attended a concert at a protestant Church in Hong Kong. This guzheng talent was pretty amazing.

Next on we go to Hang Seng Bank to buy some gold. It's very easy, you just go to counter, ask for some Perth mint kangaroo coins and it's like going to the store buying groceries.

The prices at that time were HKD 10065/ounce, HKD 5105/half ounce. This is a 4% premium which is very good when you don't need to pay for shipping costs. People are waiting in rows to buy gold in China and Hong Kong, it's the most normal thing to do, unlike the Western world, where they don't even know how much it costs.

Then we go to Causeway Bay to look at the protests. I think the hype is completely overblown. This will not impact the economy of Hong Kong whatsoever. There are less busses, less people at retail stores. But this is only one small part of Hong Kong. Tiny part....

Managed Money Short Update: Gold/Silver

What is very surprising this week is that gold and silver managed to go up, while no short covering has taken place. So we are seeing shorters trying to keep the gold/silver price down and not succeeding in it. This is a very bullish sign for precious metals as the real short squeeze is still to come. Currently we are seeing a rally in the precious metals market based on fundamentals and not solely on short covering. Probably some of the hot money in stocks went into gold during the stock market sell-off.

The COT report also confirms from last week that the bottom is in as large commercials have positioned themselves on the long side. In particular, silver still has a long way to rally.

On the premium side, nothing special is happening, still record silver premiums of 14% at Shanghai.

Junk silver premiums still at new plateau of 9%.

The next 3 weeks, the blog will be a bit quiet as I'm going to Hong Kong (to report on the protestors).

Correlation: Buybacks Vs. S&P

Buybacks are the hot item in 2014. Share repurchases happen when companies have a lot of cash. They buy up the company's shares with that excess cash and then destroy the shares. The amount of shares go down, the earnings stay the same. The earnings per share go up, so the share price will go up.

The correlation below shows that relationship between buybacks and share price.

 

Today (2014), almost 90% of all S&P companies are buying back stock. But when we look at it on a market cap basis, buybacks are decreasing, which will mark a top in the stock market. When the stock market finally goes down, liquidity will be a problem as companies have spent all their cash.

These buybacks are financed by debt.

Market Outlook

In the past few weeks we have seen a lot of changes in investor sentiment. It all started at the end of September 2014. We had a lot of bad economic news coming. A falling labor participation rate, lower PMI readings, falling consumer sentiment, lower factory orders, declining oil demand, falling home prices, lower GDP growth revisions, declining bond yields, a drop in Dow transportation index, lower Baltic Dry Indices, lower Chinese power consumption growth and more recently falling retail sales.

As a result, the Dow Jones has posted losses for 2014. What's most interesting is that volatility has now started spiking, which is never a good sign for stocks (see chart below from Google Finance). Volatility has seen similar spikes in 2008, 2010 and 2011 which all resulted in a correction in stocks.

On the other hand, gold has been very strong this year based on a higher fear index and higher volatility. Since October 2014 we have seen an additional anomaly where oil goes down and gold goes up. I see this as a buying opportunity in the gold and silver mining sector.

Oil has been declining due to a lower global oil demand (see chart below from Yardeni Research) and due to a higher supply from the shale gas boom in the U.S. and increasing supplies from Saudi Arabia. Though, I expect that at these prices of $80/barrel WTI crude oil, we will see a huge decline in shale gas production going forward. Shale gas producers can't break even at these crude oil prices at $80/barrel.

Especially those shale gas companies with a high debt load will be the hardest hit. For example Continental Resources (CLR), which is a bet on the Bakken shale play, has had a major decline in stock price since the oil price made its dive in October 2014 (see chart below of  Continental Resources CLR).

There are many reasons why markets are correcting now.

Read the analysis here.