Tyler Durden


Almost two years ago I wrote, “Why Warren Buffett Would Be Buying Precious Metals Again (If He Could).” In that piece, I referenced a quote from his 1997 Letter to Berkshire Hathaway Shareholders:

“Last year, we purchased 111.2 million ounces. Marked to market, that position produced a pre-tax gain of $97.4 million for us in 1997. In a way, this is a return to the past for me: Thirty years ago, I bought silver because I anticipated its demonetization by the U.S. Government.”

Last week, Berkshire Hathaway revealed a stake in Barrick Gold, one of the BANG stocks I have been writing about for the past couple of years.

And I believe this investment is once again related to “demonetization.”

However, in 1967 the word meant one thing; today it means something slightly different.

53 years ago, “demonetization” meant the breaking of the dollar’s official link to gold.

Today, because there is no longer any official link, it means the dollar’s value relative to gold will deteriorate, and possibly to a significant degree, just not all at once like it did in 1971 as a result of the “Nixon Shock.

The demonetization of the dollar today is less of a shock and more of a slow and steady burn which only makes it more insidious.

Just over a year ago, Charlie Munger, Warren’s parter at Berkshire, had to say in this regard,

“I am so afraid of a democracy getting the idea that you can just print money to solve all problems and eventually I know that will fail…

All the politicians in Europe and America have learned to print money…

Who knows when money printing runs out of control?

At the end, if you print too much you end up with something like Venezuela.”

Since then, the affinity for money printing has only grown in Washington and the Fed’s balance sheet has nearly doubled as a result.

In this light, it’s not hard to see why the recent actions by Congress and the Fed to generate the biggest fiscal deficit-to-GDP in history and monetize the entire amount would inspire the greatest investor of modern times to put on an inflation hedge.

As I wrote a while back, Berkshire is too big today to buy precious metals directly but an equity investment that may be a much more efficient inflation hedge than your average stock is right up their alley.

And it doesn’t hurt that Barrick has spent the past several years remaking itself in Berkshire’s image.

Author: Tyler Durden

Source: Zero Hedge: Why Warren Buffett’s Pouncing On Precious Metals (Again)

In an attempt to avoid another retail-driven momentum meltup similar to what happened with Chinese stocks earlier this month when government-media first encouraged Chinese investors to buy stocks only to backtrack days later when local markets soared sparking fears of another stock bubble on the mainland, Reuters reported that Chinese regulators and major banks have been rushing to curb precious metal trading by domestic investors to temper speculation that could send prices explosively higher, something we hinted at just last week.

The scramble to limit risks comes as gold prices hit record highs this week, spurred by investors hunting for safe haven assets in markets rattled by worries of rising coronavirus cases, lofty equity valuations, and a plunge in the U.S. dollar which prompted Goldman to contemplate if the days of the world’s reserve currency are numbered.

Industrial and Commercial Bank of China (ICBC), the country’s largest bank said on Wednesday it would bar its clients from opening new trading positions for platinum, palladium and index products linked to precious metal from Friday. That directive, according to the lender’s customer service department, was in response to “violent price volatility” and “the need to control risks.” The reality? It is neither in China’s, nor any other government’s interest, to see gold prices soaring as they likely would if tens of millions of Chinese speculators rushed to bid up the precious metal.

Similarly, Agricultural Bank of China said it had recently suspended new businesses related to gold, while Bank of China also said it halted new account openings for platinum and palladium trading.

Meanwhile, the Shanghai Gold Exchange said on Tuesday that gold and silver holdings were high, and it would take risk-control measures if warranted to protect investors.

It’s odd how investors are never “protected” when stock prices soar… but only when gold and silver do.

The Shanghai Futures Exchange, where gold and silver futures contracts are traded, also urged its members to strengthen risk-management efforts and invest rationally.

“Gold remains a niche investment in China due to limited investment channels,” said Frank Hao, an analyst at Hywin Wealth Management in Shanghai. “Investors mainly rely on purchasing paper gold products at commercial banks as a way to counteract risks.”

Chinese investors have also been actively buying up gold ETFs, whose turnover has jumped in recent weeks. Huaan Gold ETF, Asia’s biggest gold exchange-traded fund, has seen its assets under management soar more than 68% to over 11.8 billion yuan ($1.69 billion) since end-2019.

Hao said any further gains in gold may spur more speculation, despite regulatory attempts to tamp it down.

“If the gold price rises past $2,000, some more hot money will certainly flow into the market, and some investors will divert their stock investments to gold,” he said.

Which really says all one needs to know: when it comes to stocks, nobody is worried about the “hot money” flowing into the market, in fact it is encouraged. But when gold explodes higher and it may “divert” stock investment to gold the authorities start to panic and do everything in their power to limit its ascent.

Author: Tyler Durden

Source: Zero Hedge: Chinese Banks Bar Clients From Buying Precious Metals

One week ago, Deutsche Bank’s top credit strategist, the often whimsical amateur piano player, Jim Reid, did the unthinkable, admitting that he is “a gold bug”, and adding that in his opinion, “fiat money will be a passing fad in the long-term history of money”, a shocking admission for most career financial professionals who are expected to tow the Keynesian line and also believe in the primacy of fiat and its reserve currency, the US Dollar.

In any case, Reid was just getting warmed up, and in his Friday “chart of the day” reminds his long-term readers that in his view, “central bank balance sheets will explode in the decade ahead and probably beyond.” To bolster his case, he refered to a recent report written by another DB strategist, the bank’s chief US economist Matt Luzzetti, who suggests that the Fed may need to add up to $12tn to its balance sheet over the next few years to reach what he thinks is the equivalent to a shadow Fed Funds rate of -5% to fill what he calls the policy gap.

For those who missed it, here is the punchline from Luzzetti’s note:

We find that the Fed will need to provide significant accommodation – roughly equal to a fed funds rate of -5% — and that QE and forward guidance could be insufficient. Assuming limited impact from forward guidance given that markets are pricing negative rates, our estimates range from an additional $5tn to $12tn more of balance sheet expansion needed. Our preferred calibration sits towards the high end of that range.

As the economist ominously concludes, “the lessons for the monetary policy outlook are somewhat discouraging. In the absence of a considerably better economic outlook due to factors exogenous to the Fed – for example more rapid development and widespread availability and usage of a vaccine or a significantly more robust fiscal response — eaningfully more aggressive QE is needed.

And visually:

That said, the Deutsche strategists caveat that “this is not a projection but more of what would be needed if they choose the balance sheet route alone. A decision to supplement QE with other tools, such as YCC and more bank or credit-oriented policies (which Matt views as likely), would reduce this amount.”

Alternatively, Luzetti quotes NY Fed president Williams who recently noted, “necessity is the mother of invention”, adding that the need to provide substantial accommodation in an environment where the Fed’s conventional tools may be limited could thus lead, over time, to more serious exploration of alternative tools.

And yes, all of the above means that the Fed will need to catalyze another market crash to usher in the next round of massive stimulus.

In any event, going back to the stunning balance sheet forecast, Reid calculates that if the balance sheet was used as the only tool, hitting this amount would take roughly 8 years at the current QE run rate, and writes that the graph above “puts this into some perspective based on 100 years plus of the Fed balance sheet in real adjusted terms. In nominal terms it took 94 years to hit the first trillion of Fed balance sheet. 12 years later we are at $7tn. Could we be approaching $20 trillion within a decade?”

Well… of course.

But regardless of whether or when it takes place, this forecast backs up Reid’s own long standing view on balance sheet growth based on the huge past, present and future debt burden the financial system has been saddled with.

And yes, anyone asking how to best hedge against the monetary insanity that is coming, the answer is very simple: keep buying gold, whose surge to $3,000 – which is also Bank of America’s price target – is just a matter of time.

And yes, silver has a long way to go to catch up to where it should be based on the long-term gold/silver ratio.

Finally, Reid has conducted a a flash poll, with the question: “Where do you think the Fed balance sheet will be in a decade?” Click here to take part.

Author: Tyler Durden

Source: Zero Hedge: Why Nothing Can Stop Gold: Deutsche Bank Projects Fed’s Balance Sheet Will Hit $20 Trillion In “Next Few Years”

For the first time since September 2016, Silver futures just broke above $20…

Just a few short months after dropping to the lowest since 2009…

As the gold/silver ratio reverses from its record high spike…

Though gold is still outperforming YTD for now…

But, as explains, silver is set to continue outperforming over the next year.

Gold is more money-like and silver is more commodity-like. Consequently, the relationships that we follow involving the gold/GNX ratio (the gold price relative to the price of a basket of commodities) also apply to the gold/silver ratio. In particular, gold, being more money-like, tends to do better than silver when inflation expectations are falling (deflation fear is rising) and economic confidence is on the decline.

Anyone armed with this knowledge would not have been surprised that the collapse in economic confidence and the surge in deflation fear that occurred during February-March of this year was accompanied by a veritable moon-shot in the gold/silver ratio. Nor would they have been surprised that the subsequent rebounds in economic confidence and inflation expectations have been accompanied by strength in silver relative to gold, leading to a pullback in the gold/silver ratio. The following charts illustrate these relationships.

The first chart compares the gold/silver ratio with the IEF/HYG ratio, an indicator of US credit spreads. It makes the point that during periods when economic confidence plunges, the gold/silver ratio acts like a credit spread (credit spreads rise (widen) when economic confidence falls).

The second chart compares the silver/gold ratio (as opposed to the gold/silver ratio) with the Inflation Expectations ETF (RINF). It makes the point that silver tends to outperform gold when inflation expectations are rising and underperform gold when inflation expectations are falling.

We are expecting a modest recovery in economic confidence and a big increase in inflation expectations over the next 12 months, meaning that we are expecting the fundamental backdrop to shift in silver’s favour. As a result, we are intermediate-term bullish on silver relative to gold. We don’t have a specific target in mind, but, as mentioned in the 16th March Weekly Update when the gold/silver ratio was 105 and in upside blow-off mode, it isn’t a stretch to forecast that at some point over the next three years the gold/silver ratio will trade in the 60s.

Be aware that before silver commences a big up-move in dollar terms and relative to gold there could be another deflation scare. If this is going to happen it probably will do so within the next three months, although we hasten to add that any deflation scare over the remainder of this year will be far less severe than what took place in March.

Author: Tyler Durden

Source: Zero Hedge: Silver Hits $20 For The First Time Since 2016… And Why It Will Go Much Higher

Authored by Lance Roberts via,

In this week’s “Technically Speaking,” the “Golden Cross” arrives, but are the bulls safe? As noted two weeks ago, is the 50/200 dma crossover is historically bullish for equities. However, with markets facing one of the worst earnings declines on record, could overly exuberant investors be walking into a trap?

Let’s start with what we wrote previously:

“As shown below, the market broke out of that consolidation and triggered “buy signals” across multiple measures. This breakout will give the “bulls” an advantage in the short-term with a retest of the June highs becoming highly probable.”

“The bulls will also gain some additional support from the “Golden Cross” (when the 50-dma crosses above the 200-dma). That “bullish signal” will likely occur over the next week or two depending on market action.”

As noted then, the “bullish supports” for the market kept our portfolio allocations weighted towards equity risk.

The “Golden Cross” Arrives

This week, the “Golden Cross” occurred as the 50-dma crossed back above the 200-dma. As suspected, the media was quick to take note. As noted by this headline from CNBC:

Bloomberg, via Yahoo Finance, was also quick on the trigger:

“The S&P 500 is sending a technical signal that has marked the end of every bear market in modern history.”

As Jeffrey Marcus noted at RIAPRO.NET (30-Day Risk Free Trial) the “Golden Cross” is indeed bullish for stocks.

“On Thursday, the S&P 500’s 50-DMA crossed above the 200-DMA. Such is known as a “Golden Cross” and has now happened 25-times over the past 50-years. The long term performance of the S&P 500 following such an occurrence is unabashedly positive.

TPA calculated the performance of the S&P 500 10, 20, 40, 80, 160, and 320 days following each of the 25 Golden Crosses since 1970. The average performance is 0.88%, 0.98%, 3.25%, 6.73%, 9.57%, and 15.70%, respectively.

The positive cross has happened 6-times in the past 10-years. The averages for 10, 20, 40, 80, 160, and 320 days following each was 0.53%, 0.89%, 2.64%, 8.17%, 10.45%, and 20.95%, respectively. “

No Guarantee Short-Term

While it is undoubtedly bullish from a historical standpoint, it isn’t always as simple as it seems. As Jeff further notes:

“There were years when using the S&P 500’s Golden Cross as a buy signal was a lot trickier than just owning stocks for the entire 320 days. In the years of 1977, 1984, 1990, 1994, 1999, 2015, and 2019 were years, the signal either did not work or spent long periods in negative territory. ”

Such was a point also confirmed by, where Jason Goepfert has analyzed these types of technical signals for decades. He found they’re “barely useful” as a standalone metric. Take 2019, for example, when a golden cross registered, only completely to reverse a year later with the Covid-19 crash.

“We wouldn’t put a lot of faith in the golden cross by itself. The biggest reason for optimism is that it has reversed what had been a very negative medium- vs. long-term trend. That has led to big gains over the next 6-12 months every time over the past 70 years.” – Jason Goepfert


An excellent example of a period where the “best of indicators” can lead you astray was in 2015. While the “Golden Cross” has a strong record over 12-months, it doesn’t mean it will be a straight line higher.

At that time, the markets climbed above the 200-dma, combined with a “Golden Cross” as the 50-dma also “crossed the Rubicon.” While the media bristled with bullish excitement, it was quickly extinguished as the markets set new lows as “Brexit” engulfed the headlines.

Importantly, while concerns about a “Brexit” on the global economy were valid, “Brexit” never materialized.

Conversely, the economic devastation in the U.S., and globally, is occurring in real-time. The risk of market failure as “reality” collides with “fantasy” should not be dismissed. It CAN happen.

Such doesn’t mean the next great “bear market” is about to start. It does mean that a correction back to support that reverts those overbought conditions is likely.

Such is why, as we discussed this past weekend, we took actions to reduce risk within our portfolios.

Lot’s Of Hope

The current advance is not built on improving economic or fundamental data. It is largely built on “hope” that:

  • The economy will improve in the second half of the year.
  • Earnings will improve in the second half of the year.
  • Oil prices will trade higher even as supply remains elevated.
  • The Fed will not raise interest rates this year.
  • Global Central Banks will “keep on keepin’ on.”
  • The U.S. Dollar doesn’t rise
  • Interest rates remain low.
  • Bankruptcies and Delinquencies will subside.
  • More stimulus will come from the Federal Government
  • A vaccine will soon be available.
  • The pandemic will subside
  • There will be a “V-shaped” economic recovery
  • Employment will recover quickly.

I am sure I forgot a few things, but you get the point. There is a lot of “hope.”

However, “reality” may be more disappointing. Such is particularly the case with valuations expensive, markets overbought, and sentiment pushing back into more extreme territory.

There is much that could go wrong.

Technical Review Of The Market

While the “Golden Cross” is certainly bullish over the next 6-12 months, it is important to note that markets are currently egregiously overbought on a short-term basis.

Furthermore, speculative excess has certainly become evident in the market on a variety of levels. However, options contracts are an excellent indicator of exuberance. As Jason went on to note:

“In mid-February, we saw that options traders were speculating heavily, a disturbing wrinkle in the positive momentum that markets were enjoying at the time. The pandemic slapped that speculation out of them. For a while.

They returned in force, and by early June, surpassed any previous speculative record. It was enough to push the ROBO Put/Call Ratio to the lowest level since November 2007.

Among all traders, the Options Speculation Index gives us a very good view of the distribution of speculative versus hedging activity on all U.S. exchanges. Once again, it’s above 50%, meaning that they opened 50% more bullish contracts than bearish ones.

Rebalancing The Equity Portfolio

For all of these reasons, this is why we chose to reduce our risk a bit last week.

“For the second time in a single year, we have begun the profit-taking process within our most profitable names. Apple, Microsoft, Netflix, Amazon, Costco, PG, and in Communications and Technology ETF’s.

(Note: Taking profits does not mean we sold the entire position. It means we reduced the amount of our holdings to protect our gains.)”

Taking profits in our portfolio positions remains a “staple” in our risk management process. We also continue to maintain our “hedges” in fixed income, precious metals, and a slight overweight in cash.

We don’t like the risk/reward of the market currently and continue to suspect a better opportunity to increase equity risk will come later this summer. If the market violates the 200-dma, or the current consolidation is breached to the downside, we will reduce equity risk and hedge further.

My colleague Victor Adair at Polar Trading, previously made a valid observation.

“The growing divergence between the ‘stock market’ and the economy the past several months might be a warning flag that Mr. Market is too exuberant. With the Presidential election just over 3-months away, the polls show that Biden may be the next President. The U.S./China tensions have been escalating, and the virus’s first wave continues to spread around the globe.”

I agree. While the markets may be ignoring the risks for the moment, markets have a nasty habit of delivering unpleasant surprises. Such is particularly the case when a handful of “Megacap” stocks are driving the markets higher. (H/T

What lifted the market higher, can, and usually does, become the catalyst that pulls it down.

It’s Probably A Trap

I can’t explain the current market environment. Yes, it is the liquidity from the Fed. It is also a chase for momentum. Regardless of the explanation, price is driving portfolio management for now.

We can deny it, rail against it, or call it a conspiracy.

But in the “other” famous words of Bill Clinton: “What is…is.”

The markets are currently betting the economy will begin to accelerate later this year. The “hope” that Central Bank actions will indeed spark inflationary pressures and economic growth is a tall order to fill, considering it hasn’t worked anywhere previously. If Central Banks can indeed keep asset prices inflated long enough for fundamentals to catch up with the “fantasy” – it will be a first in recorded human history.

My logic suggests that sooner rather than later, someone will yell “fire” in this very crowded theater.

When that is, is anyone’s guess.

In other words, this is all probably a “trap.”

But then again, “hope does spring eternal.”

Pay attention to how much risk you are taking. The “Golden Cross” doesn’t provide the bulls a “guarantee of safety.”

Author: Tyler Durden

Source: Zero Hedge: “Golden Cross” Arrives, Are The Bulls Safe?

Now that both OPEC+ and OPEC no longer exist, and it’s a free-for-all of “every oil producer for themselves” and which Goldman described as return to “the playbook of the New Oil Order, with low cost producers increasing supply from their spare capacity to force higher cost producers to reduce output”, the key question is just how long can the world’s three biggest producers – shale, Russia and Saudi Arabia…

… sustain a scorched-earth price war that keep oil prices around $30 (or even lower).

While we hope to get an answer on both Saudi and US shale longevity shortly, and once the market reprices shale junk bonds sharply lower, we expect the US shale patch to soon become a ghost town as money-losing US producers will not be solvent with oil below $30, assuring that millions in supply will soon be pulled from the market, moments ago we got the answer as far as Russia is concerned, when its Finance Ministry said on Monday that the country could weather oil prices of $25 to 30$ per barrel for between six and 10 years.

The ministry said it could tap into the country’s National Wealth Fund to ensure macroeconomic stability if low oil prices linger. As of March 1, the fund held more than $150 billion or 9.2% of Russia’s growth domestic product.

Incidentally, this may explain why over the past two years, Putin has been busy dumping US Treasury and hoarding gold: he was saving liquidity for a rainy day, and as millions of shale workers are about to find out today, it’s pouring.

Author: Tyler Durden

Source: Zero Hedge: Russia Says It Can Weather $25 Oil For Up To 10 Years

Gold jewelry owners have almost been as frantic as the price of gold itself over the last few weeks.

Front month gold futures spiked to almost $1700/oz leading up to last week’s decimation, amid coronavirus fears and a widely growing acceptance that central bankers will once again be stimulating the global economy and supporting asset prices.

As quickly as gold rose, it fell. During last week’s equities selloff, margin calls forced the price of gold futures to tank as low as $1564 on the Friday session, before finishing the session down $55, or about 3.3% lower.

All the while, people are frantically scrambling to try and sell their gold jewelry, anticipating that the price hike of about 8.4% in the precious metal since the beginning of the year may not hold.

Tobina Kahn, the president of House of Kahn Estate Jewelers told Bloomberg: “Old gold sales always jump when prices rise, but we’ve never seen a surge like this.”

Bookings for jewelry assessments were up 12% at her shop. She continued: “No one is saying, ‘I want to wait because I think gold will go up even more’. They realize this is time sensitive. It’s a flight-to-safety rally that’s based on fear.”

Little do the sellers know, they should be buying gold instead of selling it, for a true flight to safety.

And the sell off on Friday could actually trigger more selling. “Everyone is hedging their bets,” said Ash Kundra, co-owner of J Blundell & Sons Ltd. in London’s Hatton Garden jewelry district.

Scrap gold usually makes up about 30% of total global supply. Even though mining outputs were flat in 2019, scrap gold in play may have rose by as much as 2.5%. Most retail buyers pay a fraction of spot prices before melting down the gold and purifying it, before making it into gold bars. Other items with collectors value, like gold Rolex watches, are resold.

Empire Gold Buyers in New York pays up to 96% of spot. Chief Executive Officer Gene Furman said:

“A typical 18-carat gold wedding band weighing about 10 grams would gain a seller about $383 at a spot price of $1,600. A gold watch weighing about 3 ounces and purchased for around $1,000 in the 1980s would probably gain a buyer around $1,900.”

Rohit Savant, an analyst at the research firm CPM Group said: “People have started to clean out their safes. They find a packet that’s been sitting there for 5 years, 10 years and they scrap it to take advantage of the higher prices.”

In China, the selling landscape is the opposite, as sales of gold jewelry are set to plummet for the year amid the economic damage of the coronavirus outbreak.

In the U.S., the story is just the opposite. “People who have been sitting at home thinking ‘time for me to sell, time for me to sell’ are coming out of the trenches right now,” Furman concluded.

Author: Tyler Durden

Source: Zero Hedge: Gold Jewelry Selling Sees “Frantic Surge” After Price Spike And Volatility

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