Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
Coming up we’ll hear from Steve St. Angelo of the SRSrocco Report. Steve talks about some promising developments with states reasserting their rights to make gold and silver legal tender. And don’t miss his outlook for oil and precious metals -- and the possibility of some real fireworks in the markets – some nice, some not so nice – later this year. Don’t miss my interview with Steve St. Angelo, one of the most respected analysts in the field… coming up in just a moment.
Well, this week raging culture wars and a big Supreme Court decision overshadowed the financial markets.
On Thursday the Supreme Court rescued Obamacare from potential oblivion. The 6 to 3 majority essentially re-wrote portions of the law that Congress had botched pertaining to health insurance subsidies. Writing on behalf of the majority, Republican-appointed Chief Justice John Roberts decided that the law should reflect Democrats’ broad intentions. Because lawmakers didn’t intend for health insurance markets to implode, the actual law they wrote shouldn’t be interpreted literally. Because, you know, doing so might bring about Obamacare’s implosion.
The creative legal reasoning behind the Court’s decision was the subject of a scathing dissent by Justice Antonin Scalia.
Others are asking whether the highest court in the land has succumbed to the “too big to fail” mentality. Much like the Treasury Department and Federal Reserve orchestrated bailouts of banks deemed too big to fail, the High Court now apparently stands ready to bail out foolish laws that are too big to fail. As for bond obligations and entitlement spending commitments that are too big to fail, well Congress can always count on the Federal Reserve to bail them out.
The Fed isn’t an actual government agency, but it effectively serves as the fourth branch of government. In some ways, it’s the most powerful branch of government because so much of what it does is done in secret. It doesn’t need the approval of Congress or the executive branch to implement policy decisions involving trillions of dollars, and those decisions can’t be struck down by the Supreme Court. In a single policy statement, the chair of the Federal Reserve can cause markets to soar or crash. Simply by manipulating short-term interest rates or monetizing debt by printing money, the Fed can influence the timing of recessions and even the outcomes of elections.
President George H.W. Bush blamed Fed chair Alan Greenspan for his 1992 election loss to Bill Clinton. He questioned Greenspan’s interest rate hikes as the economy went into recession, but Bush the Elder didn’t question the Fed’s legitimacy. Nor did Bush the Younger.
Recent Presidents and nominees for President have never openly criticized the Federal Reserve System on a fundamental basis. There’s a strange bipartisan consensus when it comes to monetary policy. The most recent Fed chairs – Bernanke, Greenspan, Volcker – have all been appointed by a President from one party, then reappointed by a succeeding President from the other party.
If Congress does finally pass an Audit the Fed bill with teeth, it would still have to garner the signature of a President. Would a President Obama sign an Audit the Fed bill that his appointed Fed chair Janet Yellen says would threaten the Federal Reserve’s independence? A President Obama or a President Hillary or a President Jeb would be bucking all recent patterns of presidential behavior if any of them defied the Fed on matters of its institutional interests. After all, the Fed views secrecy as crucial to its ability to strategically intervene in the economy and markets.
And speaking of markets, precious metals prices moved to the downside this week. Gold gave up $27 through Thursday to close at $1,174 an ounce. As of this Friday morning recording, the gold market is settling at $1,171, down 2.5% on the week. Silver also looks lower by 2.5% this week, with prices currently coming in at $15.75 an ounce. Silver is now oversold near the bottom of its major trading range for the year.
Turning to the platinum group metals, platinum prices were little changed through Thursday’s close – which means they gained on a relative basis versus gold, something that platinum hasn’t been doing much of this year. Platinum currently trades at $1,075, a slight 1.0% weekly loss.
Palladium, on the other hand, took a big plunge this week on softening automotive demand from China. Meanwhile, production of palladium from South Africa is on the upswing since last year’s strikes forced mine closures. Rising supply and cyclically weak demand mean the record supply deficit that experts had predicted this year probably won’t pan out. Instead, according to the latest forecasts from Johnson Matthey, global demand for palladium will exceed output by just 100,000 ounces rather than the previously forecasting figure of 1.8 million.
Supply deficits are still likely to impact the silver market in a significant way – if not this year, then very likely by this time next year. It’s just not tenable long-term for silver to be trading below all-in costs of production, which is the situation many struggling mines face at present. And even when spot prices do rise to make silver mining more economic, it could take years before new mines open in response.
Extreme spot price fluctuations make silver mining an extremely difficult business to be in for the long-term. Even when silver prices are moving higher, profits aren’t guaranteed. The advantage of being a bullion investor is that you don’t need to take on debt or deal with labor unions, environmental regulators, or other business threats that could wipe you out. You just buy and hold until the time is right to sell. And in the meantime, you don’t let the market wear you down or scare you out of your core position in hard money.
Well now for more on the potential for a growing imbalance in the supply-demand dynamic for silver and other important developments in the markets, let’s get right to this week’s exclusive interview.
Steve St Angelo: Mike, it looks like events are heating up in the market so it's great to chat about some of these things that are taking place.
Mike Gleason: Certainly. Well we do have lots to cover so I'll dive right in. First off, I wanted to ask you about the recent announcement by the state of Texas that they're going to build their own depository and store the state owned precious metals themselves versus leaving it in the hands of the New York Fed. What do you make of that? What does it say about the trustworthiness of these major financial institutions?
Steve St Angelo: It actually says a lot. Kyle Bass who made a fortune betting against the sub-prime market. He was very early. I found out about ... Actually, the story behind him ... He is the one that actually convinced Texas to ... the school system to have their gold and purchase gold. It's been up in New York. It was at the New York Fed, but it has been moved to a private vault in New York, but they're going to build, and what was interesting, Mike, was not only did Governor Abbott of Texas announce they're going to build a new depository, he made sure in his press release, he said a gold and silver depository. That's important because silver is mentioned there, not just as an industrial metal, but it's in the same vein as a monetary metal. Texas has always been a little bit different, but I think different in a good way, because they believe in rights. Not only do they want their gold, they want their gold back on their own ground and they also stated that they're going to put some kind of bill where it cannot be confiscated from the federal government.
This is interesting because Utah passed gold and silver as legal tender, I believe it was in 2013 or beginning of ... 2012, 2013. Arizona did that last year. They also passed a bill that makes gold and silver legal tender. So if you wanted to pay your taxes to Utah or to Arizona, you could do it in gold and silver and if you could find people to trade with goods and services and they would take gold and silver, you are legal to do that in those states. We're seeing the states now take control in getting back to a more sound money. I think what Texas is doing, you may see this increase in other states.
Mike Gleason: Switching gears a little bit. India has certainly been making news for the amount of silver it's been importing of late. The Indians have certainly been known for their affinity for gold for centuries, but their appetite for silver seems to have really expanded. Talk about that. Why do you think that's happening?
Steve St Angelo: India is on track to import 9,000 metric tons. They've already imported 3,000 in the first 4 months of the year. This is actually up from 7,000 last year. Now the United States has been one of the largest importers of silver in the world and the reason why is we have a lot of industrial applications. We imported about 5,000. In certain years it's 6,000, especially during 2011. It was 6,000 because there was a lot of investment demand. India tends to be more of a roller coaster ride. When they import a lot of silver bullion, they imported a record 108 million ounces of silver in 2008 during the crisis. They had a very high imports back then. In 2012, when silver actually plummeted, imports fell as well. They see silver as a steal at this price. Some say, because the gold taxes are high. They were purchasing a lot of silver bullion back in 2008 when there wasn't any gold taxes.
So when you look at the top 3, which are India, 9,000 metric tons. The United States has actually increased its silver imports and I think I've mentioned in several interviews and articles, that we really don't have the extra demand for silver. Somebody is acquiring this extra silver that's coming into the country. We're on track to import 6 and China is going to import 3,000 (are on track too). That's 18,000 metric tons. There's only 27,000 metric tons of mine supply. China is holding on to all their silver that they mine. Really, if you minus them out, there's only 5,000 metric tons Mike, for the rest of the world. So India is putting severe stress on the wholesale demand for silver and I think if we see fireworks coming toward the 3rd, 4th quarter of this year, we could actually see their imports increase, which would cause even more stress.
Mike Gleason: Meanwhile, here in North America, we continue to see sustained demand for government minted coins. June sales for both the Eagles and the Maples have been way up as you just reported on your site this week. The Royal Canadian Mint had record sales on silver Maples in the first quarter, so I guess that means JP Morgan is buying Maples now instead of Eagles. I say that in jest of course, but talk about this and also comment on the rumors that JP Morgan is behind all the silver Eagle buying because I know you have a thing or two to say about that.
Steve St Angelo: Sales right now of silver Eagles, if we have another strong week, they'll be about 21 million. So we're only a million off of last year's half year sales, which is very good because things have been a little bit light in the first 3-4 months. So we've picked up again and I think people sense there's something going on in the markets so we're seeing a big increase in demand for Gold Eagles as well as Silver Eagles in June.
I've mentioned in a few articles, that yes, silver imports in the United States have increased significantly. It's like 35% compared to last year. The market demand really doesn't dictate that. So somebody is acquiring it. It could be ... JP Morgan could be one of the big buyers. I've talked to many people in the industry and they know a lot of the authorized dealers who actually purchase the Silver Eagles from the US Mint. None of them have heard anything that JP Morgan is buying Silver Eagles or Silver Maples. It doesn’t behoove them to purchase silver Eagles. It makes much more sense for them to buy silver ingots, so I think it might be hedge funds buying Silver Eagles. They could be. I think most of it are large buyers and individuals who are ramping up because they sense something is going to happen at the end of this year. That's why I think silver sales are still very strong in the retail market.
Mike Gleason: You make a compelling case for higher energy prices and higher metals prices over the long run. There's a real frustration in both the metals camp and the peak oil camp that markets just aren't reflecting reality. We know markets aren't always rational, but we also know that they can't remain irrational forever. Are you seeing clues to indicate reality is about to reassert itself?
Steve St Angelo: Excellent question. As you know, on my site, I started investing the precious metals in 2002. It wasn't until 2007-2008, I realized that no one was talking about energy. You cannot mine gold or silver without energy. Now the top gold producers, they're mining gold at 1.2 grams per ton. So it takes a lot of energy to remove, to process just 1 ounce of gold.
I started looking at how energy was going to impact the precious metals, the mining and the overall economy. I found out that peak oil is here. We haven't seen peak yet. But we have been in a plateau for conventional inexpensive oil production since 2005 -- 10 years. The only thing that has increased is unconventional and other liquids that really don't count as oil. Matter of fact, natural gas plant liquids have been increasing significantly since 2005, but when oil was $100 per barrel, you could only $40 for natural gas plant liquids. That is counted as liquids in the overall number.
Anyhow, to me, I see the severe stress on the system when we start to see a peak and decline of cheap oil as well as unconventional. And the market is being propped up by a lot of leverage and a lot of paper. Mike, that's only possible if you have a stable or growing energy supply. Well, because we've had a stable cheap energy supply for the last 10 years, that's the reason why we have seen all this additional leverage put on the market to give the illusion of growth where the GDP growth has actually been inflation. When we start to see the downside of this peak oil, it will put a lot more stress on the system and it's doing it already. That's why we're seeing all this volatility in the markets. The system could go at any time. Each 6 months, each year that the situation will get even more dire in the energy situation. It will pull the plug on the Fed and central banks propping up the markets. That's when we'll see a mad rush into physical assets such as gold and silver.
Mike Gleason: People are starting to talk about another financial crisis, stock prices are sky high based on PE valuation and there's more debt and leverage in the financial sector than ever. I want to hear your thoughts on what might happen to metals prices if we get a scare on Wall Street. Now back in '08 we saw a massive liquidation of all assets and metals weren't immune, although they did bounce back much quicker than the mainstream financial assets. But this time around we're looking at metals and commodity prices at much lower levels than they were leading up to the last financial collapse. How do you see things playing out here for gold and silver in such a scenario?
Steve St Angelo: It seemed when QE started, when they started propping up the markets in 2009, and then onwards, precious metals and commodities tend to, and the stock market, the broader stock market, all went up in unison. When QE3 came out, I think the Feds and central banks, especially the Feds, figured out a different way, a different approach, unfortunately, the precious metal community, as well as I, thought that when QE3 came out at the end of 2013, actually 2012, we would see continued higher prices in gold and silver. We got the exact opposite. What happened was, money went into the bonds, money liquidity went into the stocks, and actually the precious metals and commodities were sold off.
So what we have now, we have a total disconnect. We have a huge hyper-inflated stock market that is forming a top. Then we have a very oversold bottoming precious metal market. People that say, well if the stock market does crash in September or October, we would see a crash in the precious metals. I don't think that will occur. I think we will see quite the opposite. The precious metals have bottomed out already. I'm not saying they couldn't go any lower. I actually think, and we're starting to see it now, as people are sensing financial turmoil in the bond markets as well as the event in Europe and Greece, I think we will see the exact opposite. I think the prices of the stock market will fall but we will see precious metals actually, they could jump significantly higher.
Mike Gleason: It'll be interesting to see if they do serve as the safe haven in that scenario. I agree with you. I do think that is a very real possibility. Touching on Greece, European officials and the Greek government have elevated can kicking into an art form it seems. Greece is bankrupt. The government has more obligations than they can possibly meet. Negotiation with creditors are yet another example of irrational behavior that cannot continue forever. Any chance of officials admitting a default this year?
Steve St Angelo: Yes. Anything is possible and we're seeing, and even on Zero Hedge today, it looks like there was no agreement. It's because of the pension plans. The Greek people, they put into power these new officials because they did not want to go down the same path that they had been on for the last 5-6 years. They wanted to get out from underneath, just like the folks in Ireland did, basically they gave a middle finger to the bankers. I think the Greek people want that. Unfortunately, I think there's been a lot of pressure on these officials from the United States and the European Union, that they can't fold.
However, Russia offers the Greek people, as well as the nations, a much better deal, especially putting a pipeline through there, helping them out with billions of dollars in aid. I think the problem is, once Greece goes to Russia, if they take that option, then why can't Italy do that? Why wouldn't Spain or Portugal? Also, if they do get another bailout, then Italy may say the same thing. Well, if you're bailing out Greece, why don't you help us out? It's a very tough situation and I think even though they make kick the can down a little further with some sort of settlement that's just lasts for maybe a few more months.
The situation will be a Greek exit. It's for the best interest of that country. I actually think we're going to see more of the European countries move towards having relationships with Russia because they want to do trade. It's in the best interest for the European countries to do trade with Russia. We may see a Greek exit this year. If not, I would imagine it will come. It just may take a little bit more time.
Mike Gleason: I know you prefer to take a longer term and more fundamentals based approach with the metals when giving your outlook or forecast, but what are you looking at as we sit here mid-year 2015, are we nearing the end of the consolidative phase in the metals? What are your thoughts there? In your very studied view, what are the reasons behind your long term outlook?
Steve St Angelo: Mike, that's a good question. I think the precious metal analysts on a whole ... I think we've done a little bit of a disservice trying to guess where the prices are going to be in 2013 at the end and 2014. We've done a disservice to people who are trying to figure this all out. Either the experienced investors, precious metal investors, or even new ones. It's hard to put a number on how things are going to unfold, when they're going to unfold. I will tell you this. As time goes on, the leverage against the precious metals just increases. It's kind of like pulling a balloon, a big balloon under the water. The further you go down, the more the price gets pushed farther down and stocks tend to just keep elevating higher. I think the Nikkei hit a new record. It's insanity.
The markets are completely insane. Just to give you an example, we didn't chat about this, but I put an article out. The top banks in the world paid fines and settlements since 2009 of $128 billion. Now, Blank of America, and I call them Blank because there's nothing there, they paid $61 billion in fines. Then we had JP Morgan and that's the morgue where all the dead bankers have been going to. They paid $31 billion in fines. CitiCorpse, I call them Citicorpse because there's nothing but corpse there. They paid $10 billion. So out of all the banks in the world, the US are on top with fines. And if you add up all that money, just the fines that the banks paid, in the last 5 years, they could've paid for all global silver production since 2007. In just the fines. It tells you just how messed up the system is.
I don't see the prices of silver falling too much from here because I'm looking at the primary silver miners and they have cut as much as they can and right now they're estimated breakeven is $17. Could we go a little bit lower? Sure. If we do, India's just going to buy more silver. They're going to import more silver. I think we're bottoming here. I do believe even though we saw a huge increase in the price of silver in 2010-2011, it went from $17 in September, 2010, to $49 in April, 2011, six months. I think this time around, Mike, it won't take six months. I think we could see that kind of move in weeks because the leverage now in the system is so tight, it's so extreme. When you have extreme leverage you have extreme moves in either direction.
I think, and I'll conclude here, even though precious metal investors have become a little complacent now that the prices continue to be lower, I think if you don't have a good holding of precious metals, it'll happen so quickly it'll be hard to acquire the physical metal.
Mike Gleason: We definitely have seen situations in the past where things get very interesting when it comes to supply and productions bottlenecks. If we do see some sort of black swan event, I'm sure it's going to get crazy. It is going to be hard to obtain metal at that point without any significant lead time. It will be quite interesting for sure. Well before we let you go Steve, tell our listeners how they can learn more about the SRSRocco Report and what they'll find there on your site and also about the new silver report you've been working on.
Steve St Angelo: Thanks Mike. If any of your listeners, readers, want to check out my site, it’s SRSRoccoReport.com. I put out 2 or 3 articles a week and I try to look at the precious metal industry, supply and demand, the mining industry, as well as certain factors of the overall economy and energy and how they all kind of intertwine.
I'm finishing up my first paid report, very modestly priced report called the Silver Chart Report. It has 48 charts just on silver of some of my work over the past 6 years, all updated, including many new ones no one has ever seen before. I have one chart that I would almost guarantee, Mike, 99.9% of the people in the precious metal community have never seen this chart before. If you look at it, it's a silver oil price chart from 1900 to 2014. When you look at the chart, it'll take all doubt out of your mind as to why the price of silver has reacted and traded a certain way over the past 100 years.
However, even though the price of silver corresponds to be price of energy, that will change in the future when we see a collapse of net present value and paper assets. The price of oil really won't dictate what the price of silver or gold are doing anymore. It will be a massive rush of people out of paper, increasingly worthless paper assets, and into physical assets. That's when we'll see this transfer of wealth from a commodity stance of silver to a high quality store of value of silver. I see that happening within the next several years.
Mike Gleason: That's exciting. I can't wait to see that myself and I certainly love your site. I always get great information there that I'm using all the time in conversations and the own research that I do. I really hit your site first and appreciate you coming on with us. It's great chatting with you as always. I look forward to catching up with you again real soon. Have a good weekend.
Steve St Angelo: You too Mike. It's been a pleasure.
Mike Gleason: That will do it for this week. Thanks again to Steve St. Angelo the SRSRoccoReport.com. One of the best metals market related sites in the entire industry.
And 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 and 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.