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David Fuller and Eoin Treacy's Comment of the Day
Category - Precious Metals / Commodities

    Crude Collapse Concerns COMEX

    This article by Craig Hemke for SprottMoney.com may be of interest to subscribers. Here is a section:

    Consider now the potential for a diametrically opposite situation in COMEX gold. Why and how could this unfold?

    COMEX gold also has "delivery month" contracts that serve as the "front month" for trading purposes until they go off the board and into delivery—at which time the trading volume rolls into the next scheduled month.
    In delivery, anyone still long the contract can stand for delivery through the COMEX vaults in New York. (And now might also stand for fractional ownership of bullion bars in London, too.)
    But global demand for physical gold outstrips supply at present, as many refineries, mines, and mints are closed worldwide due to Covid-19.
    Thus, we are seeing a growing need/demand to hold COMEX contracts into delivery. For the current month of Apr20, total gold deliveries on COMEX exceed 3,000,000 ounces. This is more than 3X the usual demand for a "delivery month".
    If an extreme shortage develops—or if any sort of "run" on the bullion bank fractional reserve system begins—demand for delivery through the COMEX and LBMA will soar.
    Demand for the front/delivery month contract will surge. However, to buy a contract, you will also need a seller—someone interested in adding a short or selling an existing long.
    And in this case, there may be NO SELLERS. Thus, what you may see is a true offerless market.
    The potential result? The exact opposite of what you witnessed Monday in NYMEX crude oil.

    Could this opposite scenario actually play out in COMEX gold? You may be reluctant to say yes, as this type of situation would seem unlikely and unprecedented. However, prior to Monday, April 20, the idea of negative pricing for the world's most important commodity was similarly unlikely and unprecedented.

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    Musings From the Oil Patch April 21st 2020

    Thanks to a subscriber for this report from Allen Brooks at PPHB which may be of interest. Here is a section:

    As George Friedman discussed in his The Storm Before The Calm, the U.S. operates on two long cycles – the socioeconomic cycle and the institutional cycle.  The first works on a 50-year time frame, while the other is about 80-years long.  The socioeconomic cycle’s last shift “happened around 1980, when the economic and social dysfunction that began in the late 1960s culminated with a fundamental shift in how the economic and social systems functioned.”  This is referred to as the Reagan Revolution, which brought lower tax rates that addressed a crucial issue facing the U.S., which was a lack of capital.  Today, we suffer from too much capital and a lack of investment opportunities, which Mr. Friedman attributes to a decline in productivity growth as we experience a falloff in innovation.  There have been a number of studies and books written about why the nation’s productivity has declined.  

    The institutional cycle deals with how the federal government’s operation and relationship to society changes.  It’s first 80-year cycle began with the Revolutionary War and the drafting of the Constitution and ended with the Civil War in 1865.  The second cycle extended to World War II.  The current cycle will end around 2025, about the same time the current socioeconomic cycle will end, leading, in Mr. Friedman’s view, to extreme chaos that will force changes on the nation that will bring social calm and economic prosperity in the 2030s, and thereafter.   

    Mr. Friedman makes a compelling case in studying how our economy, government, society and geopolitical role in the world have evolved and changed since the arrival of the first colonists in the late 1500s and early 1600s.  Without expounding on his discussion, the nature of cycles, something we pay attention to in the business, investment and energy worlds, has driven us to think about how the future may evolve.  

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    Email of the day on mean reversion risk in precious metals:

    Good afternoon Eoin, I am enjoying the daily video and the written commentaries. Regarding your medium and long-term view that the price of gold is and will be reflecting the increasing and competitive debasement of currencies, but that presently gold is in an overbought phase, please explain what you would consider the maximum drawdown in gold to undo the overbought situation.

    Would that imply that gold should e.g., give up about $170 (10%) and reach approximately $1530 which I believe is the 200 SMA? Same question for silver. In what time frame do you expect the undoing of the overbought situation for gold (and silver) to happen? Days, weeks, months? How quickly would the bull market resume?

    It seems that the script of the last financial crisis is happening at 4-5 times the speed of 2008/2009...) What likelihood do you see that governments and central banks in the end will intervene (on an international scale) to either confiscate or prohibit the private holding of gold and silver and/or otherwise make sure that the nuisance of gold and silver as uncontrolled non-fiat money disappears? Roosevelt and others like Hitler, Soviet Union already proved that this can be successfully implemented ...Second addition to my first message/questions: To what extent did the rally in stocks trigger yesterday's and today's downdraft in the PM sector? Thank you!

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    Email of the day on the spread between Comex futures and London spot gold prices:

    Hi Eoin, could you please comment on the pricing discrepancies between Comex and spot? It is playing havoc with the Gold ETFs which are not reflecting the underlying as well as they should be.

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    Email of the day on uranium

    Thanks for the insightful video, as always, Eoin. Have you had a look at the uranium sector lately? The spot price has jumped along with the miners, including Cameco and Denison which jumped 26% yesterday. Is the long-awaited supply crunch coming into play and how long will the uptrend last? Your thoughts on this will be appreciated.

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    Email of the day - on support for the high yield debt market and who pays?

    It goes beyond even this though, and the Fed now has powers to buy the actual junk rated ETFs, direct from the market. So yes, they can directly buy the debt of the fallen angels like Ford and Macy’s but pre-existing junk bond issuers also stand to benefit. There really does seem to be no end to the rescue packages served up by Governments across the world.

    The question remains though as to who will ultimately pay for this? In the U.K. we have only just exited an era of deeply unpopular austerity. Do we delve straight into more of the same? With a post-election promise of massive equalisation between North and South, I can’t see how that sticks. Or are we looking at increased taxes on the wealthy through direct asset-based taxes? Someone has to pick up the tab after all.

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    Looking for Leverage to Gold; Reviewing Common Metrics Used for Equity Selection

    Thanks to a subscriber for this report from B Riley FBR which may be of interest. Here is a section:

    As we wrote in our March 24 industry note, we see extreme monetary and fiscal stimulus leading to dollar deflation. In this environment, similar to the set up in 2008, we expect gold price to trade materially higher and we have raised our gold price forecast to $2,500/oz. With higher prices, gold miners stand to benefit from substantial margin growth, assuming that industry-specific cost inflation remains low. In our opinion, investors should be looking to build positions in gold-related equities that give them exposure to gold. In our experience, investors will gravitate to large-cap producers and select those with the largest annual production of gold. Investors will also look to published gold reserves (and resources) in the ground, and selecting those equities with the largest accumulation. While neither of these section methods is without its flaws, we have reviewed our coverage and aggregated this data. As we indicated in our January 30 gold industry note (“Strategies for Outperforming the Gold Miner ETFs”), we continue to recommend investors build a concentrated portfolio of our favorite names that offer gold leverage, but also minimize exposure to production interruptions and provide exposure to the M&A cycle that historically accompanies a gold bull market.

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    Nobody ever pressed "Stop" before

    Thanks to Iain Little and Bruce Albrecht for this insightful report which may be of interest to subscribers. Here is a section:

    Cyclical Bear Ending; Secular Bull to Resume; Investor Feedback & FAQs

    Thanks to a subscriber for this report by Mike Wilson at Morgan Stanley. Here is a section:

    Gundlach Sounds Alarm on 'Paper Gold' ETFs Raking in Billions

    This article by Katherine Greifeld and John Gittelsohn for Bloomberg may be of interest to subscribers. Here is a section:

    The process of swapping GLD shares for physical gold sits “outside of normal dealings,” according to State Street Global Advisors head of ETF research Matthew Bartolini. Bank of New York Mellon, the fund’s trustee, doesn’t interact with the public but only with middlemen known as authorized participants -- traders who channel assets in and out of the fund. An investor would have to work with one of GLD’s APs to acquire gold, he said.

    “An individual investor wishing to exchange the Trust’s shares for physical gold would have to come to the appropriate arrangements with his or her broker and an authorized participant to receive the gold bars,” Bartolini wrote in an email.

    Gundlach said earlier in March that while he was neutral on gold mining companies, the metal would ultimately go higher. The $51 billion DoubleLine Total Return Bond Fund, Gundlach’s mortgage-focused flagship fund, lost 1.3% this year through Monday and returned an annual average 2.6% over five years.

    For Bloomberg Intelligence’s Eric Balchunas, that process isn’t necessarily a problem. Most investors buying gold ETFs are doing so to get exposure to bullion’s price movement, rather than to acquire physical gold, he said.

    “The problem with getting physical gold is you’ve got to insure it or keep it in a safe spot,” Balchunas said. “Generally speaking, most people don’t want gold. They want the return stream that gold gives.”

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