J.P. Morgan Vault Doubles Registered Silver

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.

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U.S. GDP Growth Slowing Down, Sell Stocks

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.

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Bank Deposits Update

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

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GDP Misses Expectations

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

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COMEX Gold's Alarming Plunge in Inventory

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.

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Durable Goods Orders Vs. S&P

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.

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Is the gold there?

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.

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The U.S. Government Has Invented a New Way of Calculating GDP

In March 2013, the U.S. government invented a new way of calculating GDP. The Financial Times reported that from July 2013 onwards, the U.S. GDP would become 3% bigger due to a change in statistics.  As this adjustment in GDP calculation is pretty significant, I will try to make an observation on which changes on the U.S. GDP will take effect, what the consequences are and how investors should act on this revision in statistics.

Read more here.

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Dow Gold Ratio

This page is created to monitor the Dow-Gold Ratio.

Whenever the Dow-Gold Ratio increases, the economy is booming. Whenever the Dow-Gold Ratio decreases, we enter a recession/depression era.

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Adjustable Rate Mortgage Vs. Federal Funds Rate

This page is created to monitor the 1 Year Adjustable Rate Mortgage Average Vs. Effective Federal Funds Rate.

The Fed Funds Rate (red chart) sets the short term rates, in particular the 1 Year Adjustable Mortgage Rates.

Whenever the Federal Reserve increases/decreases the lending rate between banks, the short term rates will follow suit.

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30 Year Fixed Mortgage Rate Vs. 30 Year U.S. Treasury Yield

This page is created to monitor the 30 year Conventional Fixed Mortgage Rate Vs. 30 year U.S. Treasury Yield.

There is an obvious historical correlation here. The thing to watch here is that the mortgage rate (blue chart) should always be higher than the treasury yield (green chart).

When this is not the case, U.S. treasury yields should decline / mortgage yields should increase.

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Wage Inflation Vs. Unemployment Rate

This page is created to monitor the Average Hourly Earnings of Production Vs. Unemployment Rate.

When unemployment declines (yellow chart), wages inflate (blue chart).

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Wage Inflation Vs. CPI

This page is created to monitor the Average Hourly Earnings of Production Vs. Consumer Price Index (CPI).

The Average Hourly Earnings (blue chart) are a good indicator for the Consumer Price Index (CPI) (red chart). 

It appears that the CPI is most volatile here, so the important trend to follow is the average hourly earnings.

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Initial Jobless Claims Vs. S&P

This page is created to monitor the Initial Jobless Claims Vs. Standard & Poor's Index (S&P).

Whenever you get higher initial jobless claims (blue chart goes down), the S&P follows suit (red chart goes down).

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Why you shouldn't buy Japanese equities

This is why you shouldn't buy Japanese stocks to profit on it as an American citizen. As the Nikkei goes up, so does the Yen decline against the USD. 

So your profit is zero.

Source: Eureka Report

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Correlation: Gold Bottoms out on Marginal Cost of Suppliers

The gold price has always followed the marginal cost of suppliers throughout history (Figure 1).

The correlation between gold prices and gold mining cash costs between 1980 and 2010 stood at 0.85, which is pretty highly correlated (Source: CPM Gold Yearbook 2011).

With the price of gold at $1400/ounce today I'm pretty sure we can't go much lower if this correlation proves to be correct (Chart 1).

Chart 1: Marginal cost suppliers of gold (Source: Eurekareport)

If we only look at the cash operating costs, we have this picture (Chart 2):

Chart 2: Production cash cost

Let's analyze these charts further. While cash operating costs only went up a little bit to $700/ounce (Chart 2), the total marginal cash costs went up to $1300/ounce in 2013 (Chart 1). So the biggest move in total cash cost came from overhead, discovery, construction and sustaining capital. In the 1980's, we see that cash operating costs contributed the most in the total cost of mining, but today, the biggest chunk of the costs go to overhead, discovery, construction and maintenance. A summary of the cost structure is given in chart 3.

Chart 3: Replacement cost for an ounce of gold

For investors, the key point to keep in mind is that cash operating costs aren't a good indicator for the gold price. You need to look at the overall costs of replacement and that includes all additional costs to mine gold. That total cost will dictate the price of gold.

I hear many analysts say that gold will go to $10000/ounce. I don't think this will happen soon, unless the total marginal cost goes up the same amount. This could happen when energy, labour, exploration, maintenance, construction costs go up or when ore grades go down. At the same time, some people say gold will go back below $1000/ounce. This is not possible because marginal cash costs are rising and we know that there is a high correlation between marginal cash costs and the gold price. 

The following chart is the most important chart every gold investor needs to be aware of. As I mentioned before, there is a high correlation between the all in cash costs of gold mining and the gold price (Chart 4).

Chart 4: All in Costs Vs. Gold Price

The gold price will therefore always follow the cost of mining which proves another important point. The rising gold price is an indicator of inflation because the higher cost of mining is a direct result of inflation.

Now consider the following. We see that many development stage gold mining companies have had increases in their exploration spending and many of these companies have had upward revisions in their feasibility studies. To name a few examples: Kinross Gold (KGC) and Novagold Resources (NG). So if capital spending on all of these projects go up, it isn't too difficult to see that the gold price will keep rising in the future.

Chart 5: Gold Exploration Spending

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Capacity Utilization Rate Vs. Consumer Price Index

This page is created to monitor the Capacity Utilization Rate Vs. Consumer Price Index (CPI).

When capacity utilization goes above 80%, the industry goes above a threshold where it lacks capacity to produce. At that moment the only way to rebalance is to increase prices.

When the capacity utilization goes above 80% (blue chart), the CPI (red chart) will follow suit after 1 year as capacity utilization is a leading indicator for inflation.

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Capacity Utilization Rate Vs. Unemployment

This page is created to monitor the Unemployment Rate Vs. Capacity Utilization Rate.

Historically, when the capacity utilization rate goes up (blue chart goes down), the unemployment rate goes down (red chart).

We also know that a high capacity utilization rate points towards inflation. Inflation points towards a higher CPI and a higher CPI means higher average hourly wages. Higher wages point to lower unemployment. And the circle is round.

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U.S. Federal Reserve Balance Sheet Vs. Dow Jones

This page is created to monitor the U.S. Federal Reserve Balance Sheet's assets Vs. Dow Jones.

Whenever the Federal Reserve expands its balance sheet (blue chart), the Dow Jones will rise with it (red chart). 

Conversely, when the Federal Reserve Balance sheet stays flat, the Dow Jones is likely to drop.

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Money Velocity Vs. Bond Yield

This page is created to monitor the Money Zero Maturity Velocity (MZM velocity) Vs. 10 Year U.S. Treasuries.

Historically, both are correlated. If money velocity picks up (blue chart), 10 Year U.S. Treasury Yields will rise (red chart).

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Gold Vs. 10 Year U.S. Bond Yield

This page is created to monitor the Gold Price Vs. Bond Yields.

Historically, when the 10 Year U.S. Bond Yield declines (blue chart), gold will have an up move (red chart).

The blue chart is actually the equivalent of the TIPS yield (Treasury Inflation Protected Securities), which is the Treasury Yield of U.S. Bonds minus the rate of expected inflation. The correlation between TIPS and gold is best visible when we invert the TIPS yield. Source: blog.yardeni.com

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GDP Vs. PMI

This page is created to monitor the Gross Domestic Product (GDP) Vs. ISM Purchasing Manager Index (PMI). 

When the PMI declines (blue chart), the GDP growth rate (red chart) declines.

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Dow Theory

This page is created to monitor the Dow Theory.

When the Dow Transportation Index declines (blue chart), the Dow Jones (red chart) will follow suit a month after that decline.

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China Gold Imports from H.K.

This page is created to monitor China Gold Imports from Hong Kong.

I'm monitoring the gross imports, net imports from Hong Kong to China.
I'm also monitoring the ratio between net imports and gross imports which measures the degree of retaining of gold by China.

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Large drop in COMEX gold, what does it mean?

Tekoa Da Silva notices, just like me here, that COMEX gold stock is declining rapidly lately.

We don't know what it means, but one of the theories is the COMEX default. Which is what happens when the downtrend keeps going on like this.

Chart 1: Comex Gold

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Gold/Silver COMEX Stock

This page is used to monitor the gold and silver stock at the COMEX.

As total gold stock decreases, open interest decreases too. I expect a reversal in the gold price down trend.

Silver open interest and total stock has started to top out, I expect a silver reversal in the coming months.

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Correlation: Initial Unemployment Claims Vs. S&P

Another way to value the stock market is to look at the initial unemployment claims. You take the inverted chart of this metric and you will see that this is highly correlated with the S&P index.

Chart 1: Initial Unemployment Claims (Inverted) Vs S&P Index

So whenever you hear that the initial unemployment claims went up, you sell the S&P index.

Oh, and what do you know, weekly initial unemployment claims just went up:
http://www.marketwatch.com/story/us-weekly-jobless-claims-edge-up-to-352000-2013-04-18?link=MW_latest_news

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Correlation: Wage Inflation Vs. Unemployment Rate Vs. Consumer Price Index

There is an inverse relationship between the unemployment rate and the wage inflation. Whenever people get unemployed, it means the economy isn't doing well. Employers won't be able to raise wages of the people during these difficult times, so you will get a low wage inflation trend (blue line). In these periods, the unemployment rate tends to go up (yellow line).

Chart 1: Wage Inflation Vs. Unemployment Rate

The same can be said the other way round. When the unemployment rate declines, people will demand a higher salary as skilled workers get scarcer. At this stage the wages will inflate.

It is also so that wages correlate highly with the consumer price index (CPI). So if the unemployment rate declines, you can expect a higher CPI as you can see on Chart 2.

So if you don't believe the CPI the government is reporting, you just look at the average hourly earnings. The average hourly earnings were positive in March. So I expect the CPI to increase too.

Chart 2: Average Hourly Earnings Vs. CPI

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Money Aggregates Climbing Again

As I forecasted here, we now see the money aggregates go up again after a slow start in 2013 (Chart 1), which also means that money velocity will go down. So you can expect that U.S. treasury yields will go down as GDP is likely to go down too with the declining PMI.

As U.S. treasury yields go down, we have a perfect environment for gold to reverse its downtrend considering the negative real interest rates.

Chart 1: Money Aggregates

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COMEX Default Looming?

The latest articles say that the LBMA, COMEX are going to default in the next few weeks. What is all this fuss about?

Apparently the open interest in silver is at record highs while the silver price is dropping. This is not normal because normally the open interest should decline. But let's first ask ourselves, what is open interest?

Open interest is the total number of options and futures contracts that are not closed on a particular day. If someone opens a call on silver on the futures market, then open interest increases by 1. If open interest is increasing at a rapid pace, that means there are a lot of traders on the futures market making calls (long) and puts (short).

The key metric to watch here is the following:

When open interest is increasing, it means that the price trend in silver will keep going up/down.

When open interest is decreasing, it means that the price trend in silver will reverse the trend.

So what do we have here? We have an increasing open interest in silver, with a declining silver price. That means the drop in silver price is likely to keep going lower as shorts are creating more and more short positions. Once the open interest trend changes, then we will see a reversal in the silver market to the upside.

Chart 1: Silver Open Intrest

So we have a huge battle in the market with a huge increase in short sellers. That increase in open interest is also found in the total stock at COMEX silver (Chart 2). You see the total stock in green is at record highs, while the real physical available silver in blue is not increasing. How can it be that we have so little physical silver in storage for delivery at the COMEX, while trading is so high? If somehow 10% of the longs start to ask for their silver delivery, the COMEX will default. And the chance of default will go up if the open interest keeps increasing. Keep watching the blue line (registered physical silver) as it goes down.

Chart 2: Silver COMEX

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Copper Contango Theory: Copper Bottoming Out?

It looks like the contango is steepening again, so that means that the price will likely go down. But the red chart seems to be topping out while the copper price seems to bottom out...

Chart 1: Copper Contango Vs. Copper Price

The COT report though is very bullish, so copper could go up in the future.

Chart 2: COT report Copper

Although the technicals are bullish, the fundamentals are very bearish. First we have the Chinese GDP below estimates. We have IMF GDP growth revisions to the downside. Record stock levels for copper. Stock markets on the verge of collapse.

We have a lot of contradictory indicators.

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Bloomberg TV

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Silver Premium Charts

I'm going to dedicate this page to monitor Silver Premium Charts. You can go to this page by clicking on the favorites link at the top of the page.

I will monitor the silver premiums from First Majestic Silver, APMEX silver coins, APMEX junk silver and Shanghai silver premiums.

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China Boosts U.S. Treasury Holdings

China buys more U.S. treasuries to keep the yuan from rising.

Chart 1: China U.S. Treasury Holdings

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Premiums on silver skyrocket

With the 10% smackdown of silver today, the premiums on junk silver skyrocketed to 25% (Chart 1). The disconnect between the physical market and the futures market is reality. The 10% drop in the futures market coincides with a 10% rise in the premium. That means that the physical market is completely ignoring the futures market right now.

Some of the junk silver bags are even sold out on APMEX.

EDIT: now the bags are all sold out.

EDIT 2: now all 90% junk silver bags on APMEX are out of stock.

Chart 1: Junk Silver Premium

The premium on the First Majestic Silver shop on silver jumped to 25% too.

Chart 2: First Majestic Silver premium on silver

APMEX premiums skyrocket to 20% (Chart 3).

Chart 3: APMEX Silver Premium

EDIT: and now they are out of stock:

Figure 1: Silver American Eagle out of stock

Meanwhile, Shanghai silver premiums are going to a high of 5% (since I monitored it) and 1% for gold.

I don't think these premiums are sustainable at all.

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