Katchum's Macro-Economic Blog

Peter Schiff at MoneyShow Las Vegas 2013

noreply@blogger.com (Albert Sung) — Sat, 18 May 2013 17:23:00 +0000

Peter can become a stand-up comedian anytime. Hilarious!

Correlation: Monitoring the GLD Trust ETF to Predict Gold Prices Based on Demand

noreply@blogger.com (Albert Sung) — Sat, 18 May 2013 12:17:00 +0000

As demand is now being dictated for a part by the ETF's, we need to pay attention to what is happening in the trusts. Are they unloading their gold? Because if they keep unloading their gold, the demand from ETF's is going to decline, which has a negative impact on the gold price. This is the theory of supply and demand.

You can monitor this chart daily at the SPDR gold trust site:
http://www.spdrgoldshares.com/usa/historical-data/

Chart 1: SPDR Gold Trust: Units in the Trust (Red Chart, right axis)

As I indicated here, ETF's were the largest sellers in gold, resulting in a 13% decline in the demand for gold. I cannot stress how important it is that ETF's keep buying gold. If they don't buy, like what happened starting in 2013, then the price of gold will decline. The great difference between 2013 and 2008 is that in 2008, ETF's were massive buyers of gold, while today they are massive sellers. Keep watching this trend. If it reverses, you can confidently start buying precious metals.

The Great Disconnect in the Paper and Physical Precious Metals Market

noreply@blogger.com (Albert Sung) — Sat, 18 May 2013 10:49:00 +0000

Over the last few months, precious metals investors have seen their net worth decline due to declining precious metals prices (GLD), (SLV). A lot of this decline in precious metals prices was due to a decrease in demand, which was the result of selling by hedge funds as the World Gold Council reported here.

First quarter gold demand of 963 tonnes was down 13% compared with Q1 2012 due to an outflow in the total gold ETF holdings of 177 tonnes. 2013 marks the first year in a decade where ETF's are actually selling gold. While ETF holdings were reduced, this selling has been countered by an increase in physical demand for gold by China and India. Total demand in China rose 20% to 294 tonnes in Q1 2013 as compared to Q1 2012 (50 tonnes increase).

This huge increase in demand for physical gold can be witnessed on Chart 1, which gives the net imports of gold from Hong Kong to China.

Chart 1: Net Gold Imports from Hong Kong to China

While Chinese demand for gold was strong, Indian demand increased at an even higher pace. The Indian demand for gold increased 27% on the same quarter last year to 257 tonnes.

On the supply side we see a total increase of 1% in the first quarter of 2013 as compared to Q1 2012. Mine production increased 4% while recycling of gold decreased 4%.

(click to enlarge)

Chart 2: ETF gold holdings in tonnes by region to end Q1 2013 (Source: World Gold Council)

So, the reason for the decline in precious metals prices is evident from an increase in supply (mine production increased) and a decrease in demand for gold (ETF outflows) (Chart 2). But there is an important point I need to make here. While the supply side is pretty constant at 1% increase, the demand side is the critical indicator we need to look at with its 13% decline. The decline was a result of hedge funds converting their gold holdings into equities. The Dow Jones (DIA) hit an all time high last week, fueled by a bullish prospect in the equity market of Japan, which on itself was a result of the massive Japanese monetary stimulus announced in April 2013. Although investors are cheering the bull market in equities, the macroeconomic conditions keep worsening. A few examples were a deterioration in PMI, capacity utilization, ISM manufacturing, vehicle sales, ADP employment, initial claims, PPI, mortgage applications, wages.

So we have a huge disconnect here in the equity markets (SPY) (Chart 3).

(click to enlarge)

Chart 3: Disconnect between equities and macroeconomy (Zero Hedge)

When the equity markets ever come back to reality, the money in the equity market will revert back to the precious metals market.

While ETF outflows were large, those outflows were countered by physical demand in Asia. As Zero Hedge reports, physical demand is still very robust (Chart 4).

(click to enlarge)

Chart 4: Physical Demand Vs. Paper Demand (Zero Hedge)

In fact, there are many signs that the physical market is going to be the driver of higher precious metals prices going forward.

First, we see that the premiums on physical precious metals have never been this high. As an example I give you the premiums on APMEX and the premium at First Majestic Silver Corp (AG) (Charts 5, 6, 7). On top of that Shanghai gold premiums are skyrocketing (Charts 8 and 9).

(click to enlarge)

Chart 5: Silver Premium First Majestic Silver Corp

(click to enlarge)

Chart 6: Silver Premium APMEX 100% silver coins

(click to enlarge)

Chart 7: Silver Premium APMEX Junk Silver

(click to enlarge)

Chart 8: Silver Premium Shanghai/London

(click to enlarge)

Chart 9: Gold Premium Shanghai/London

Second, gold lease rates (the interest rate of gold) have been rising to a new one year high (Chart 10). Indicating a very low GOFO (Gold Forward) rate, which means there is backwardation in gold. Historically such low GOFO rates mark bottoms in the gold price.

Chart 10: Gold Lease Rates

Third, we see a decline in registered gold at the COMEX. This indicates that gold is in short supply. Whenever investors try to redeem large amounts of their gold from the COMEX warehouses, they are mostly told that they will be settled in cash, which is basically a default or force majeure.

Lastly, we see that many miners are cutting back on their production. For example, Endeavour Silver (EXK) had to readjust its plans for the year, cutting back on capital investment and exploration. Another example can be found at First Majestic Silver Corp , where capital investments were cut by 16%. This will ultimately be bullish for the precious metals itself. It's also important to notice this. While paper gold prices decline, the selling price of the bullion by some of these miners won't decline with it as a result of increasing premiums (See Chart 4). In other words, the decline in precious metals prices on the paper market is countered by an increase in premiums on the physical side of the precious metals market. This means that the profits of these miners will stay the same (as the selling price stays the same). What this means is that we will first see the miners bottom out, while the paper price of precious metals keeps falling. So investors need to keep an eye on the miners. I believe they will start to outperform the bullion price first.

As a matter of fact, one of the most prominent precious metals investors, Eric Sprott, has confirmed that he has been selling the bullion to acquire an increasing stake in the miners.

The conclusion of this all is that we are witnessing a shift from the paper market to the physical market in gold and silver and the price will start to be dictated by the physical market.

Gold Lease Rate

noreply@blogger.com (Albert Sung) — Mon, 13 May 2013 17:17:00 +0000

This page is created to monitor the "Gold Lease Rate".

The gold interest rate earned on fiat gold is commonly referred as the gold “lease” rate.

It is calculated as:

Gold Lease Rate = Libor Rate - Gold Forward Rate.

The LBMA presents the data every day at this link.

Whenever the gold lease rate tops out (spikes upwards), the gold price will hit a bottom as central banks demand the gold back from the bullion banks at higher gold lease rates. So it is a bullish sign to have high gold lease rates. It means that the GOFO rate is very low, which indicates backwardation in gold.

Gold Price Target

noreply@blogger.com (Albert Sung) — Sat, 11 May 2013 06:33:00 +0000

This page is created to monitor the target price of gold as opposed to the money supply M1, central bank forex reserves, fed custodials and U.S. external debt.

M1 correlates to gold because the more money is present in the system, the more gold can be bought and the higher the gold price will become.

Central bank forex reserves correlate to gold because a central bank tends to have as much gold as forex reserves on their balance sheet.

Federal Reserve Custodial accounts are a group of accounts that contain money from foreign central banks (mostly treasuries and a some MBS's). In other words these are the U.S. debt holdings of Foreign Central Banks around the world. It is a direct measure in our opinion of how foreign central banks view the stability and value of the dollar, and the current monetary policies of the US. It frequently shows changes in major financial trends far ahead of "the crowd's" awareness. A rising custodial trend is accompanied by rising gold prices.

Increasing U.S. external debt (which can be found here) leads to higher gold prices because the amount of gold held by the Federal Reserve should be linear with the U.S. external debt held by foreigners. Technically, to be solvent, the U.S. should be able to sell all of its gold to buy up all external debt. As of 2013, external debt was $5.5 trillion. The U.S. held 8133.5 tonnes (or 260272000 oz’s) of gold. To be solvent, the gold price would need to be $5.5 trillion/260272000 = $21131/ounce. This is 15 times higher than the current gold price.

Red Alert in Gold Lease Rates

noreply@blogger.com (Albert Sung) — Fri, 10 May 2013 08:08:00 +0000

I have become very bullish lately on silver and was already bullish on gold.

But the following chart makes me ultimately bullish. We see the biggest increase in gold lease rates as of yesterday and we have seen this before. In 2008, the gold lease rates started to spike upwards, which meant gold was in short supply. It also meant that the "interest" to hold gold was going up, just like the "interest" on your cash is going up.

This ultimately means that the world is valuing gold at a higher interest rate and the central banks are demanding their gold back from the bullion banks.

We are in for a huge upside move if you ask me.

Percentage of U.S. Government Public Debt held by Foreigners

noreply@blogger.com (Albert Sung) — Fri, 10 May 2013 07:46:00 +0000

This page is created to monitor the Percentage of U.S. Government Public Debt held by Foreigners.

The debt held by foreigners can be found here.

From the chart we can conclude that an ever increasing amount of the U.S. Government Public Debt is financed by foreigners. As long as the chart keeps increasing, U.S. bonds are in demand by foreigners. Once this chart starts to decline, it means that confidence of foreigners in U.S. debt is starting to wane.

Central Bank Balance Sheets: U.S., Eurozone, Japan

noreply@blogger.com (Albert Sung) — Thu, 09 May 2013 06:10:00 +0000

This page is created to monitor the balance sheet of the U.S., Eurozone and Japan.

There is a strong correlation between the price of gold and the expansion of the total sum of all central bank balance sheets in the world.

ECB = blue

U.S. Federal Reserve = red

Bank of Japan = green

(The Chinese balance sheet is not included in this graph as it is not available on FRED)

China Gold Imports Hit Record High

noreply@blogger.com (Albert Sung) — Tue, 07 May 2013 15:53:00 +0000

An update on the China Gold Imports from Hong Kong has just been put out on Bloomberg. It is amazing, how much they are buying, imports more than doubled.

http://katchum.blogspot.be/2013/04/china-gold-imports-from-hk.html

And the thing is, the massive drop in the gold price in April is not even counted in the numbers yet.

Copper Contango Alert

noreply@blogger.com (Albert Sung) — Tue, 07 May 2013 15:44:00 +0000

Just a small reminder that the contango in copper is now dropping.

That means the copper rally is about to start now.

=> http://katchum.blogspot.be/2013/05/copper-contango-theory.html

Potemkin Rally

noreply@blogger.com (Albert Sung) — Mon, 06 May 2013 20:00:00 +0000

The Potemkin Villages were Russian constructions, created to deceive others into thinking something is better than it really is.

The Potemkin Rally describes how the Federal Reserve is manipulating the market in order to create a deception of a rising stock market. It looks like the economy is improving, but it's actually just a mirage.

As long as the following chart (stocks divided by Fed Balance Sheet) stays flat, the stock market rally is really engineered by the Federal Reserve. If the Federal Reserve takes the punch bowl away, everything collapses.

Silver About to Reverse in Price

noreply@blogger.com (Albert Sung) — Sat, 04 May 2013 08:57:00 +0000

According to the COT report for silver, the open interest in silver came down dramatically this week:
http://katchum.blogspot.be/2013/05/cot-report-goldsilver.html

That means the silver price is likely to reverse to the upside. Also, commercial shorts have almost all been covered now.

According to the COMEX report for silver, J.P. Morgan doubled its registered inventories from eligible silver, meaning that total silver stock is likely to go down. This confirms the COT report's drop in open interest.
http://katchum.blogspot.be/2013/04/gold-and-silver-comex-stock.html

Interest Payments as a Percentage of Tax Revenues

noreply@blogger.com (Albert Sung) — Fri, 03 May 2013 19:32:00 +0000

This page is created to monitor the U.S. Interest Payments as a Percentage of Tax Revenues.

One metric that the U.S. government can never manipulate is this ratio. You can apply hedonic adjustments to inflation numbers, you can calculate GDP differently, but you can't falsify the amount of interest payments on government debt and you can't falsify tax revenues.

This ratio measures the affordability of government debt. A spike upwards means that the country is having difficulties servicing its debt load. This can have many causes, like higher yields on bonds, higher public debt or lower tax revenues.

Average Hourly Earnings do not confirm Unemployment

noreply@blogger.com (Albert Sung) — Fri, 03 May 2013 17:19:00 +0000

As Zero Hedge reports here, the average hourly earnings were going down. That is not consistent with a lower unemployment rate.

Coincidentally, I have a chart on this correlation right here.

And it looks like this:

As you can see, how can the unemployment rate fall (yellow chart) if the average earnings go down (blue chart).

Reason: part time workers and people leaving the labor force.

Deficit to Outlay Ratio

noreply@blogger.com (Albert Sung) — Fri, 03 May 2013 16:42:00 +0000

This page is created to monitor the U.S. Deficit to Outlay Ratio.

It measures how much of the government spending (outlays), comes from borrowing of foreign money (deficit).

A deficit to outlay ratio above 40% indicates that there is a high probability of hyperinflation.

Today (2013) we have an unprecedented deficit to outlay ratio of 30%.

COT Report Gold/Silver

noreply@blogger.com (Albert Sung) — Fri, 03 May 2013 15:42:00 +0000

This page is created to monitor the COT report for gold and silver

Whenever the commercials turn long (purple bars go up), the price will bottom out and vice versa.

Open interest (green line) indicates the direction of the price:

- When the price declines and the open interest increases: the silver price will keep falling.

- When the price rises and the open interest increases: the silver price will keep increasing.

- When the price declines and the open interest decreases: the silver price will reverse to the upside.

- When the price rises and the open interest decreases: the silver price will reverse to the downside.

Chart 1: COT Gold

Chart 2: COT Silver

Money Supply

noreply@blogger.com (Albert Sung) — Fri, 03 May 2013 15:26:00 +0000

This page is created to monitor the Money Supply.

Base money is basically correlated to the Federal Reserve's Balance Sheet (red chart). When base money is increased, the other monetary aggregates (M1 in green, M2 in yellow, MZM in blue) will follow suit.

The expansion of the money supply is the very definition of inflation. As long as these charts go up, we will have inflation.

Copper Contango Theory

noreply@blogger.com (Albert Sung) — Fri, 03 May 2013 15:17:00 +0000

This page is created to monitor the experimental "Copper Contango Theory".

Historically, when the copper contango is high (red chart tops out), then we have a bottom in the copper price (blue chart bottoms out).

We see the red chart top out, which means we could see a bottom in copper prices.

Additionally, when the commercials go long (purple chart goes up), copper bottoms out in the short term.

J.P. Morgan Vault Doubles Registered Silver

noreply@blogger.com (Albert Sung) — Tue, 30 Apr 2013 21:31:00 +0000

I think this is very significant. J.P. Morgan's vault just recorded a doubling in registered silver coming from eligible silver.

You know what that means, allocation of silver, which means someone wants delivery. Open interest will start to come down with the decline in total silver stock.

Be prepared for the reversal in silver price.

U.S. GDP Growth Slowing Down, Sell Stocks

noreply@blogger.com (Albert Sung) — Tue, 30 Apr 2013 15:56:00 +0000

The Chicago PMI just went in contraction from 52.5 to 49.0. This confirms all the bad news we already had in the previous months.

I expect that with this lower PMI, the ISM manufacturing PMI composite index (NAPM) will go down too.

And with that drop, the GDP growth will most certainly drop too. I would be very cautious if you are still buying stocks, thinking it will go higher.

Bank Deposits Update

noreply@blogger.com (Albert Sung) — Fri, 26 Apr 2013 15:57:00 +0000

Remember the Cyprus debacle in March? We were worried about deposits declining.

In February, deposits declined in Cyprus, Ireland, Greece, Portugal. But they increased in Italy and Spain.

In March, we see the same happening again. So I don't see any significant changes. Maybe the Cyprus crisis was just a little drop in the sea.

Chart 1: Bank Deposits

GDP Misses Expectations

noreply@blogger.com (Albert Sung) — Fri, 26 Apr 2013 15:29:00 +0000

The 2013 Q1 real GDP was weaker than expected. 2.5% year over year instead of 3.2%. With a miss in expectations, be prepared for lower stock markets as we are due for a correction. We are overvalued for sure.

But actually the number is pretty good. the GDP growth to debt growth ratio has inched up since the last release (Chart 1). Nominal GDP grew 1% from a quarter ago, while debt grew 2.4% in the same period.

Chart 1: Zero Hour Debt

COMEX Gold's Alarming Plunge in Inventory

noreply@blogger.com (Albert Sung) — Thu, 25 Apr 2013 19:28:00 +0000

Today we see a quite alarming drop in the COMEX gold stock. Do you see how the total gold stock (green chart) is plunging? Do you see how the registered gold (blue chart) is disappearing?

I know the COMEX can't default, but we will see cash settlements for gold deliveries like never before. If we see the trend going further down at this rate, you won't get your physical gold, I can assure you that.

Silver open interest is still rising with higher stock. I don't expect a reversal yet in the silver price down trend, but I see signs of a topping out.

Durable Goods Orders Vs. S&P

noreply@blogger.com (Albert Sung) — Wed, 24 Apr 2013 20:11:00 +0000

This page is created to monitor the Durable Goods Orders Vs. S&P.

The durable goods orders are new orders placed with domestic manufacturers for delivery of factory hard goods.

If we see a plunge in durable goods orders (blue chart), we know for sure that in the months to come we won't see a lot of activity in factories as orders decline. There will be less work and that will reflect itself in the stock market, in particular the S&P (red chart).

The durable goods orders chart is the less volatile of the two and should be a good indicator for the S&P, which is more volatile.

In recent months we see the durable goods orders flatten out, which means the S&P will likely decline in the coming months.

Is the gold there?

noreply@blogger.com (Albert Sung) — Tue, 23 Apr 2013 18:06:00 +0000

As the gold stock at the COMEX keeps dropping precipitously, we get more and more signs that the banks and warehouses don't have any gold or silver available for delivery. Junk silver premiums made a new high of 27% today. Chow Tai Fook in Hong Kong is out of gold bars. It's only a matter of time now, when this will become mainstream media.

Edit: On 24 april, registered gold hit a new low and total gold stock hit a new low at 8 million ounces. This drop is the largest one in years. Something is happening.