Excess Reserves and the Yield Curve

Excess reserves at the Fed have been going down as the Fed started to unwind its balance sheet (blue line). But oddly, deposits minus loans at commercial banks were steady flat (red line). Why is this?

Moreover, this means that there are a lot of deposits but not enough loans. Taking into account that the yield curve is approaching zero (green line), banks need to pay the same interest to depositors (short term maturity) as they receive in loan interest (higher maturity), but this needs to be done on more depositors than loans.

Which means bank profits will be going down while the Fed reduces its balance sheet and its excess reserves. Less excess reserves also means less money being paid by the Fed to the banks via IOER.

When the blue line approaches zero and the red line doesn't, something magical will happen.

Chinese Silver Premiums approach danger zone

DANGER

The U.S. dollar is slowly losing status

Just a small update on COFER to see if the U.S. dollar is losing status: the long term trend is down, but it is still the most important currency.

 

And in more detail: 2017-2018: you can see the U.S. dollar is slightly dropping in status.

Silver Depletion in 20 Years

I have been wondering what the status is on the silver depletion.

The USGS reports global silver reserves each year and this report can be found here.

I have charted this here.

- Poland, Russia, Peru and Australia have seen increases in silver resources.
- Chile, Canada have seen decreases in silver resources.
- Peru is the largest producer with the largest reserves, followed by Mexico.

When we look at the total reserves, we get this: We have 533000 tonnes of silver resources in the world.

Now, the annual silver production can be found here: We have 25000 tonnes silver production per year.

Which means silver will be depleted in approximately 20 years (if no extra silver resource is found). See you in 20 years when silver skyrockets!

Gold / Silver Premiums Up

After several months we finally see premiums go up, just at the moment that the U.S. mint stopped selling silver. The reason the U.S. mint stopped selling silver is not because there is no supply, it is because there is no demand. U.S. mint sales have dropped to record lows (see chart below). So it can't get worse than this, only better.

On the other hand, as precious metals prices are dropping, the premiums have gone up at the miners, dealers and China.

So that is looking good for precious metals investors.

The managed money shorts graph is looking good too, especially for silver.

 

COMEX registered gold is again at all time lows, which shows me that China has been buying all the London vaulted gold as GLD is hitting lows. The low amount of registered gold means that there is no chance that GLD vaulted stock can go lower.

Leverage (registered to eligible) is almost at a new high, which means the gold price is now at the bottom.

So there is no better time to buy gold and silver right now.

No slowdown in growth from China

When I look at China power consumption numbers, I don't see any slowdown in growth. July power consumption hit a new high.

Gold/silver price Vs. Oil price

When we chart the Silver/Gold price minus Oil price, we can have a good idea on the margins of the precious metal miners although oil costs are just a small part of the overall costs (only 10% of AISC). As you can see here, the trend has been higher since 2014.

=> Producer Price Index by Industry: Gold Ore and Silver Ore Mining - Crude Oil Prices: West Texas Intermediate (WTI) - Cushing, Oklahoma

The HUI index though (miners), has not been following the correlation since 2014. This is because the gold and silver price has been breaking down lately and sentiment is not positive. Other costs like development costs due to lower grade ore could also have a negative impact. Nevertheless, the chart above is a good indicator for the health of mining companies (comparing the gold/silver price against the oil price).

 

Energy costs are just 10% of the total AISC costs of a miner. So it doesn't have a significant effect on the overall costs in mining. Miners with a high strip ratio and open pit mines have more exposure to energy costs.

When we look at the revolution in Electric Vehicles (EV), we notice that gasoline consumption will drop (gasoline demand/price goes down) and EV demand will go up (silver demand/price will go up).