Gold and Silver Premiums Rising

After several abysmal weeks of declines in precious metals, I see a renewed physical interest in gold and silver.

First of all, mining companies keep their physical bullion prices at the same level which leads to high premiums.

Furthermore, precious metal dealers see a high premium again. Not too shabby, but it's improving. We will need to give this some time.

 

But what is most interesting is that China is buying all the gold and silver the West is selling. Once again, what we saw in 2013 is happening all over again. Shanghai silver premiums have skyrocketed back to 8%, so a bottom is near.

 

Shanghai gold premiums are moving up very swiftly, indicating that China is bargain hunting.

However, the COT report is not looking good at all. Managed money is still very long and a lot of large commercial shorts are still in the market. So weakness in precious metals could persist until the end of the year.

 

2016 Silver Deficit

According to the interim Silver Institute report, silver is still in deficit for 2016 at 52.2 Moz in 2016.

So the deficit trend is still intact although softer compared to historical deficits. The net balance is now -185.5 Moz.

 

Total silver supply is forecast to fall 3% in 2016, but demand has also fallen 10% from last year.

The Feedback Loop in U.S. Bond Yields

Imagine what is happening now.

U.S. bond yields are going up.



Japanese and European bonds are overvalued against the U.S. bonds because of their lower rates. So everyone is selling them. But Japan has kept their bonds at 0% yield artificially.



Which means Japan Central Bank needs to print a lot of money to buy up those bonds to keep rates low. And that will debase the Japanese yen. Which is happening right now.

USD/JPY

Japanese yen is debasing, so that means China will need to debase yuan too otherwise it will be not competitive enough in Asia currency basket.

USD/CNY

Yuan going down is correlated with more selling of U.S. treasuries which will blow up U.S. bond yields into the stratosphere and there you have your feedback loop.

And finally, a higher U.S. bond yield means velocity of money picking up and that leads to inflation.