Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
We have a special treat for you later in today’s program – an exclusive interview with Steve St. Angelo of the SRSRocco Report. Steve reveals some alarming developments in the global oil market which could sneak up quickly, crush the economy, and bring down the monetary system, while leaving gold and silver as the last things standing.
But first, let’s get into this week’s market action.
We’re seeing some mixed signals in the precious metals right now. On the one hand, gold and silver prices moved modestly lower through Thursday’s close. On the other hand, they held up relatively well in the face of a rising dollar and resurgent stock market.
Through Thursday’s close, gold spot prices were off just $7 on the week. As of this Friday morning, gold comes in at $1,233 an ounce, down 0.5% since last Friday’s close. Silver prices currently trade at $17.34 an ounce now unchanged for the week. Turning to the platinum group metals, platinum prices are heading slightly lower and come in at $1,261 an ounce, even as palladium is putting in a strong performance this week after several weeks of declines. After finding support near the $750 level for the fourth straight week, palladium prices have advanced 4% to $787 per ounce.
Harry Truman famously complained of economists constantly telling him “on the one hand this, on the other hand that.” Truman jokingly asked for a “one-handed economist.”
Unfortunately, financial markets rarely lend themselves to one-handed analysis. For every buyer, there’s a seller. For every bull, there’s a bear. And no one knows exactly what news will come out or how it will move the markets from week to week.
Compounding the difficulty in analyzing precious metals markets is the fact that what drives futures markets on any given day may bear little relation to the fundamentals of the physical markets. And yes, futures markets can be manipulated – particularly since there is a substantial use of leverage.
Speaking of manipulation, this week mega-bank JP Morgan was hit with a huge fine by European authorities for its involvement in yet another interest rate rigging scandal.
The nation's biggest bank is facing a huge fine from European regulators for conspiring with some Switzerland-based lenders to rig Swiss interest rates. JPMorgan along with Credit Suisse and UBS were slapped with a $120 million fine for what the European commission called taking part in financial cartels to manipulate Swiss franc interest rate derivatives.
JP Morgan is, of course, actively involved in the gold and silver markets. Some say illicitly.
Interestingly, JP Morgan on Wednesday reported an abnormally large withdrawal of gold from its COMEX inventories. 10 metric tons of gold were removed from its eligible inventories in just one day. As for where all this gold is going, we can only guess. Central banks in Russia and the Far East are among the potential buyers of a physical gold stash that large.
Physical buying among the smaller retail buyers that we serve remains robust despite the tough, grinding market conditions and low headline inflation numbers. Wednesday’s release of the latest Consumer Price Index data shows the official inflation gauge rose just 0.1% in September. The so-called Core CPI, which strips out food and energy inputs, also rose by only 0.1%.
This, coupled with the recent plunge in oil prices, increase the odds that the Fed won’t move to raise its benchmark interest rate anytime soon. Its next move could be another stimulus scheme. Even as Quantitative Easing officially winds down, talk of another stimulus program is back on the table among several Fed governors.
The Fed simply won’t stop trying new ways to reinflate the economy until it gets what it wants -- which is an inflation rate of 2%. Eventually, the Fed will overshoot. Precious metals often serve as leading indicators of inflation, so they can be expected to move well before higher inflation rates make the news.
Inflation protection has been heavily discounted, especially in the silver market. Current silver prices – below miners’ actual per ounce production costs – are attracting plenty of bargain hunters. Here at Money Metals Exchange, we sold a record number of ounces in September. And existing holders of silver coins are for the most part refusing to let go of their holdings into this market.
As a consequence, we are starting to see tightness in pre-1965 90% silver coinage in particular. These no-longer-minted coins exist in a limited supply and can begin to command higher premiums when buying interest picks up. That’s what’s happening now.
Will the higher premiums for silver junk coins translate to higher premiums across the board? The answer is “yes” if the buying stimulated by lower spot prices drives more demand than mints and refiners can meet. It’s starting to look like that may be the case. But for now, we still have many low-premium silver bullion products readily available without delivery delays. They include our privately minted rounds and bars -- and most government-minted coins.
Now for more on a range of topics from how an imminent peak in energy production will greatly impact our entire economic system, and the role that precious metals will play when it does come crashing down, let’s get right to this week’s exclusive interview.
Mike Gleason: It is my privilege now to be joined by Steve St. Angelo of the SRSrocco Report. Steve is an independent researcher and investor who follows the precious metals and energy markets like few others and has one of the very best content-based websites in our industry and it's great to get a chance to talk to him. Steve, thanks for coming on the program today.
Steve St. Angelo: Yeah, hey Mike, it's good to be here.
Mike Gleason: I've got a number of things I want to discuss here and we'll bounce around a little bit. I'm going to try to cover a lot of ground with you, but I want to start out by examining a mind-numbing theory that you have been talking about on your site, and that is the idea about how cheap energy is simply paramount to the existence of our current economic system. I'll quote one of your recent articles here. You wrote "The peak and decline of cheap oil will be DEATH on the fiat monetary system, especially the U.S. dollar." Expand on that and also give our listeners an idea about what your research shows about global oil production, and how close we may be to peak oil, and then the ramifications of significantly higher energy prices.
Steve St. Angelo: M. King Hubbert, he predicted back in 1953, that the U.S. would peak in oil production in 1970 and in 1970 we did about 10 million barrels a day. He went on to forecast that the world would peak in about 2000. Well, he got it wrong in about five years. Then Ken Deffeyes and Colin Campbell, they said that we would peak about 2005, conventional production and Mike, We did. We peaked 2005, and that was the year oil was $25 a barrel. Well, since 2005, we've had more demand and what happened is, it pushed the price up. These two gentlemen, Deffeyes and Colin Campbell, said that we will continue to see the price move higher. In 2011, it was $111 a barrel. It increased 4 1/2 to 5 times its price. What that did, it allowed this expensive shale oil tar sands to come on. What we have done is, we've peaked in cheap oil (in) 2005, and the last ten years we've been adding this junk oil. It's filled the blanks. What has happened is, it has pushed the price of oil much higher and doing that, everything costs a lot more. That is why we have seen the price of silver and gold go up.
Now, let me just give you a little bit of an understanding of why it's just not peak oil. In 1930, the U.S. was producing oil at 100 to 1 energy returned on invested. That means, for every barrel it cost in energy, we produced 100 barrels for market. In 1970, this fell to 30 to 1. Currently, they estimate it is 10 to 1. It is continually falling. Shale oil comes in at a whopping 5 to 1. That oil shale that we have supposedly have a trillion barrels in Colorado and in the West, that comes in at 2 to 1. What is happening is, not only is production peaking, and it is, the energy we get from this oil is falling so it just becomes more expensive. Charles Hall who has been studying the EROI, which is the energy return on invested, he says that the minimum EROI for a modern society such as ours, we need at least 10 to 1 and maybe 12 to 1+. Shale oil and tar sands, they fill in the gap, but they are not paying the basic minimum requirements for energy for our system.
What has happened, since 2005, we have been living in one bubble after another. Actually, it started in the 1990's but especially since 2005, 2006. We really haven't had any GDP growth since 2007. How do you get GDP growth? Well, you have monetary stimulus, you have money printing, and you under report the inflation. You under report the actual inflation rate, which makes GDP higher. We haven't had any growth since 2007. This is shown by our oil demand. What happens is, a fiat monetary system such as the dollar, it needs a growing energy supply to continue. Unfortunately, we've peaked in 2005. We've brought on this real expensive stuff. It has kept the system going forward, but we have had to prop the whole system up with a lot of monetary printing. Well, that has worked up to now and it may work a little bit longer, but where we start seeing a decline, and that looks like we will see that in the next few years, then it is impossible for the Fed and central banks to prop up this system with inflation. They just can't do it.
In a nutshell, gold and silver are the stores of money, because when you have a coin, a gold or silver coin, you actually have something to trade. Where we have the dollar and all of these debts that we have, they are future energy liabilities. That's the reason why I believe, and not many people look into this, that the peak and decline of oil production will put severe pressure on this huge debt-based system. That is why I believe that gold and silver are the safest investments to own going forward.
Mike Gleason: Our economy is so tied to the Federal Reserve. You alluded to them a moment ago. I'm not just talking about their policy decisions being important, but also the rhetoric they spew on an ongoing basis. Now one of the topics you've written about is how the Fed is bamboozling the public. Exactly how are they doing that?
Steve St. Angelo: A lot of analysts talk about the Fed and central banks. They are basically manipulating the price of gold and silver. The focus is on the manipulation of the gold and silver monetary markets. I would believe there is monkey hammering. We see that how the price will just fall 2 or 3% in the morning. That's going on, but the real manipulation, the real bamboozling, as I call it, is brainwashing Americans into thinking certificates, IOU's, or digits in a bank are real wealth. What's happened, and they've designed it this way, Americans continue to funnel a weekly, monthly, income stream for their retirement, pension plan, 401K, or whatever. They continue to put that into this Ponzi Scheme. The manipulation of the metals is a very small part of controlling Americans into staying into this system. Because, as you know, a Ponzi System continues to need further income, further inflows, for it to continue. It's in the best interest for the Fed to keep that system going. That to me is where the majority of this bamboozling or brain washing is taking place.
I see it everywhere. I know regular people, and you probably deal with this, that they just don't want to invest in gold and silver. It's amazing too, because it seems to be a western phenomenon, but more of a U.S. American phenomenon. We could talk about the actual supply, gold and demand investment a little bit later. That's how I see it. They continue to get Americans to contribute into a Ponzi Scheme that won't last. Again, as I mentioned before, energy drives the markets. Energy drives economic growth. It's the interest. It's the little bit left over, after you pay all of the bills for growth, that you are able to go ahead and pay back investors or pay back retirees. You continue to need growth to allow that system to function. A peak and decline of energy will totally destroy that system, and I think much sooner than later.
Mike Gleason: There is a significant amount of precious metals being bought up by China and others, and it's been going on for years now. You just mentioned this in your previous answer. It seems like everyone in the world is buying gold except the U.S. I know your research shows this. What do you make of that? Why is it happening? And what will the fallout be from this?
Steve St. Angelo: One interesting data point, Turkey, in 2008, that is when we thought everything was going to fall apart. We had the collapse of the investment banking system. I mean, Lehman Brothers was around since the Civil War and they're gone. Basically the entire U.S. investment banking system imploded and what was left over was absorbed into the large commercial banks of the U.S. Turkey has a population of 76 million. In 2008, they purchased 57 metric tons of physical gold investment. In 2013, they almost doubled it at 102 metric tons. Their population is 76 million. Now, the U.S. is the only region, or let's say country, in the world that has actually declined in gold investment since that banking crisis. In 2008, the U.S. had purchased 79 metric tons in physical gold investment and we have a population of 320 million people. Well, in 2013, that declined to 67 metric tons. As I spoke before, the brainwashing, unfortunately of Americans to continue this paper Ponzi Scheme, and it's a huge paper Ponzi Scheme. It's the retirement assets, it's the treasury, it's the dollar. To continue getting Americans to have faith in that system, you can tell how it has affected gold investment demand. It has fallen considerably.
How is this going to impact the world going forward? Well, Thailand and Vietnam, they doubled their gold investments since 2008. China has more than quadrupled. They went from 76 metric tons in 2008, and it was over 409 metric tons in 2013. The gold continues to flow from West to East. It's interesting, I think Russia purchased 1.2 million ounces of gold, this is the actual Russian government, for their reserves. They increased it 1.2 million ounces in September. You've got Russia, China, and India, and they are all increasing either in their reserves or the population is buying a lot of gold. We continue to print money, manufacture derivatives. I think when this thing falls apart, Mike, Americans are going to be just stunned. I've heard, the U.S. can fall into a third world nation status very quickly. That sounds shocking but if you look at this information of gold heading East, I wouldn't be surprised if that's the outcome. It could happen rather quickly.
Mike Gleason: On the supply side of the equation, we learned of some important news within the last week about one of the primary silver miners, First Majestic announcing that they are simply going to hold onto a big portion of their third quarter production because prices are just too low to make it worthwhile for them to release it into the market. Do you anticipate other producers doing the same? What type of impact will this have? Also, given the significant amount of demand that we are seeing, for instance you and I discussed offline the huge sales of Silver Eagles from the U.S. Mint, we've seen an increase in year over year of Silver Maple Leaf sales as well. Something has to give here, right? A long-winded question, but talk about the First Majestic news and then comment on this potential supply/demand imbalance.
Steve St. Angelo: Yeah, Mike, we have to give First Majestic a lot of applause. They are the only primary miner that are trying to hold back sales of their silver to look for a better return. This isn't the first time they did it. They did this back last year and quarter too. If your readers remember, and listeners remember, back then the price of Silver went from $35 in October 2012, down to $18 in June of 2013. First Majestic, they decided to hold back 700,000 ounces of their production until the next quarter. Unfortunately, they actually had to sell it for 61 cents less an ounce in the third quarter. Now they have held back almost a million ounces in quarter three and they are looking for better prices next quarter. There are a couple of other miners that could do this. First Majestic produced 2.7 million ounces in quarter two. Tahoe Resources, they are the new kid on the block, they produced 5.7 million, and Pan America produced 6.5 million. Pan America is making a little bit of money, but Tahoe is making a lot of money. They are one of the few miners that are making a lot of money.
They could hold back a million, two million ounces. I think Pan America could hold back a million. We could see two or three million in the quarter. There are not too many other miners that could do that. Fresnillo, out of Mexico, they have a lot of production, they could hold back but I don't know how much of a reaction this would be on the price. It would be to me more of a stance, like a media thing, a public relations thing. I think all in all, I don't know if holding two, three, or four million ounces of silver back in the market will do much. Because as we know, base metal supplies most of the silver production in the world with 70%. First Majestic is trying to make a stance showing that they are not going to stand for these low prices. I will tell you what, my quarter two estimated break-even, for my twelve top primary silver miners was like $19.60 an ounce, and that's from cutting for the last year. They've cut a lot of things to get it down that low. That's not a sustainable price.
Mike, we're at $17.20 today. I think three or four were profitable last quarter. One was very profitable, and that's Tahoe, but now at $17.20, there's only one that's making any money, and several are really bleeding. I would hope they would do more of this. It may get some public understanding of just how costly it is to produce silver. Going forward, we are going to have to see how the prices unfold. I actually think the metals are being manipulated in the paper market and they really don't care about the small primary silver miners. Unfortunately, that's the case.
Mike Gleason: I've seen different reports on this, but you're seeing $18, $20, all in average production costs, is that about where it's at? I've seen that reported differently by different sources, but what does your data show there? Then, what's the trend on the cost of production for the miners?
Steve St. Angelo: I'm going to do a report on this because unfortunately, Mike, there is a metric called cash cost. A lot of people go by what the official GFMS and the CPM Group put out. I think last year it was right under $10. They are saying $9, $10. Well, that confuses people. They think well that's the bare minimum they can take. Hecla, they stated a one million dollar loss last quarter and that’s after they received $19.70 an ounce. I mean, what kind of hemorrhaging would they get at $15, much less their cash cost is $5. I explained why a lot of these companies have a low cash cost and it has nothing to do with profitability. It is more of bragging rights. My estimated break-even is right around $20. Now, the all in sustaining cost by these miners is between $17 and $18, but that's net of byproduct credits, and that's a whole other topic for a whole other day. I actually believe, if we are going to do sustaining, I think the break-even right now is $20 and sustaining for future production will be $25 or higher. Those are my figures for the group as a whole.
Mike Gleason: Given all of this, I have to think that you view precious metals ownership as an extremely important part of an investor's portfolio given all of these data points. Is that fair to say?
Steve St. Angelo: Yeah and let me explain and clarify this. Some say "Well, Steve, you think the cost of production is what the value of silver or gold is." Absolutely not. The cost of production gives us a baseline bottom figure of what the bottom line would be for it. It should not fall too much below that for a period of time. That is where the break-even is, but the value of gold and silver, we much remember, it's competing against a hundred trillion in global conventional assets, paper assets under management, 23 trillion, or actually now it's 24 trillion in the U.S. retirement market, but the entire global bond market that is the majority is the U.S. Treasury, which is another Ponzi scheme. There is one thing, the cost of production is a bottom line where we don't see it falling too much below that, but the future value of gold and silver, in my opinion, will be shown when the paper assets, when this whole Ponzi scheme starts to implode, and then you are going to see a huge movement of investors out of paper into physical. At that point in time, production costs will probably rise considerably, but it won't matter.
I don't know if you saw this, this is a little off topic, but there was 321,000 ounces just taken off of J.P. Morgan's gold inventories today and that's out of its eligible. That's a 33% decline in one day. Now, is it going to head back into another bank vault tomorrow? Or, is it going to China or India? I don't know, but that's a big movement. We have not seen something like that almost all year. A third of J.P. Morgan's gold inventories were just removed today. I think events are starting to heat up. When you start adding the peak of production of U.S. production, oil production, global oil production, when you start to notice how the economy and the markets are ... The stock market is dealing with these huge convulsions in the last week or so of up and down of 200, 300, 400 points. There is a lot of volatility now. It looks like something is going to break. My view, and I'll conclude this whole statement with this ... You can purchase physical gold and silver up to the point where the paper markets crash and after that I think it will be very hard to find any.
Right now, people have this sense of security they can "I'll wait until it goes lower." or "I'll wait until later on." and we don't know when that's going to happen but the day after will be too late. What do you think about that?
Mike Gleason: I think a lot of people are lulled into complacency right now given what we have seen in the markets the last few years, but there is certainly a lot of reasoning to think that we are going to see a big spike when it does finally move. It certainly is an interesting thing to follow, but we are keeping a close eye on supply of all of the different refineries that we work with, and mints and so forth. Yeah, when it does move, I think it could move rather quickly, we definitely agree on that.
Steve St. Angelo: This is one more thing I want to clarify, or I want to discuss real quickly. A lot of precious metal investors have become complacent and actually some are bearish. I mean, you can't blame them. Some may have got in at higher prices and now we are looking at three year lows basically or close to three year lows. They are becoming complacent. They are becoming a little bit bearish. They believe that the Fed and the central banks will be able to manipulate the paper markets for a long time. That's a pretty good assumption because they have done that for quite a long time to begin with. My theory is a “black swan” can take it down at any time. The system is that weak. If that does not happen, the peak and decline of oil production, and we are starting to see the signs in shale. Just to give you a quick name, the Barnett shale gas field in Texas peaked in 2011. The Hainesville also peaked in 2011, and that's another shale gas field. It was producing 7.2 billion cubic feet a day. It's almost at half now. It's 3.9 billion cubic feet a day.
The media will tell you all of the good stories. We are still increasing production, and yes we are, but a lot of things are starting to turn around now and I don't see this lasting 5, 10, 15 years. I think we are going to see serious changes in the oil industry within the next couple of years. To me, the Fed and central banks can't manipulate paper prices in a falling physical oil environment. To me, a gold and silver investor, that is something they should keep in the back of their mind. This is not something that can go on for decades, as some think.
Mike Gleason: Before we let you go, Steve, tell our listeners about how they can learn more about the SRSrocco Report, and what it is that they will find there.
Steve St. Angelo: Okay, if you go to the SRSroccoReport. com, I put out three or four articles a week. I basically try to keep some updates about what is happening in the supply and demand figures, but I do focus on how energy is going to impact the precious metals, mining, and overall economy. In a week or two, I will be coming out with my first paid report on the U.S. gold market giving you a whole idea of the trends since about 1981. These reports are modestly priced. They are very inexpensive but it will give a reader a lot more detail you won't find on my site. I will continue to put updates and new articles. Any reader that wants to come by and take a look, they are more than happy to. I think you will find a lot of information there you won't find anywhere else on the internet.
Mike Gleason: I can definitely vouch for that. It has been great chatting with you. We could have covered a lot more ground. We are certainly going to have to do this again. Thanks for joining us.
Steve St. Angelo: Okay, Mike. It has been a pleasure.
Well, that will do it for this week. Thanks again to Steve St. Angelo of SRSRocco Report. Check back next Friday for our next weekly market wrap podcast. Until then, this has been Mike Gleason with Money Metals Exchange. Thanks for listening. Have a great weekend everybody.
About the Author:
Mike Gleason is a Director with Money Metals Exchange, a precious metals dealer recently named "Best in the USA" by an independent global ratings group. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.