Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
Coming up we’ll hear an insightful and fascinating interview with Steve St. Angelo of the SRSrocco Report. Steve reveals some alarming information about the silver supply shortage situation and talks about a possible tipping point in global silver inventories. Don’t miss my conversation with Steve St. Angelo coming up after this week’s market update.
Well, it’s been quite a tumultuous few days in the financial markets since I spoke with you last Friday. We’ve seen some of the most severe daily price swings in the stock market since the depths of the 2008 financial crisis.
We’ve also seen the most severe rout in crude oil prices in many years. The key energy commodity plunged to as low as $38 per barrel earlier this week before surging an extraordinary 10 % on Thursday to over $42 a barrel.
Precious metals markets certainly haven’t been spared from market gyrations. Gold gained more than 3% last week only to give back nearly all of those gains by the middle of this week. But the yellow metal has rallied a bit here yesterday and so far today with gold prices currently coming in at $1,137 an ounce, off about 2.1% on the week.
Turning to silver, prices plunged more than 4% on Wednesday alone to briefly bring spot silver to $14.00 an ounce. Silver managed to close a few pennies above the $14.00 level for the day, but the down move did bring silver prices to slight new multi-year lows on the charts.
Silver stackers can at least take some encouragement in the fact that silver prices rebounded late in the week to trade at $14.55 as of this Friday morning recording, paring some of the massive early week losses and is now down 5.3% since last week’s close.
So if Wednesday’s spike low does turn out to be the real bottom, it will be one that no one foresaw and no one had time to call. That’s how these markets work sometimes. They seem to exhibit a sadistic streak – fooling as many experts as possible and frustrating as many investors as possible before embarking on a new uptrend.
One of the catalysts for the rally in commodity prices yesterday was comments from Federal Reserve officials indicating they’re less keen on raising rates next month. New York Federal Reserve Bank chief William Dudley said the case for a rate hike is “less compelling” than it was a few weeks ago. Former Treasury Secretary Larry Summers weighed in with stronger language urging the central bank to stand pat.
Dagen McDowell: It is now the wrong time for the Federal Reserve to hike interest rates. Former Treasury Secretary, Larry Summers, thinks so saying that the Fed would be making a dangerous decision raising rates now.
Charles Gasparino: Now that they should've raised it 8 months ago, that's when the economy was seemingly improving. Now to do it now is crazy. I will say this, if this economy can't take a 25 basis points hike in the Fed funds rate then we're in really, really deep you know what. Markets do have psychology and if you're telling people that things are really bad out there, that's why we got to keep rates low, there is a propensity for people to go out and say, “Oh my God, things are really bad. Let's hoard our cash, let's buy gold.”
So it appears that Fed critics such Jim Rickards were right. Rickards appeared on this very program in the spring and said the Fed’s economic models were flat out wrong and that Fed officials were just making things up on the fly. He predicted the economy would underperform later this year and make it very difficult for the central bankers to raise rates. That’s exactly what seems to be happening.
Apologists for the U.S. economy can blame the downturn in China, collapsing emerging markets currencies, Greece, Russia, or whatever else they want. But the economic collapses taking place overseas may be leading indicators for a crash still to come in the U.S.
You’ve probably heard some of the warnings of a September/October crash from various commentators including Gerald Celente, Jeff Berwick, Bo Polny, and others. Much has been made of a 7-year cycle coming due next month. It’s the same cycle that coincided with the 2008 crash 7 years ago, the 2001 terrorist attacks, the 1987 crash, and other major events.
Markets do tend to move in cycles, and certainly the 7-year pattern is worth keeping in mind as you plan your investing strategy. But we do caution against reshuffling your entire financial life around one potential scenario. And it is just that, a scenario that could potentially play out starting next month.
Nobody knows for sure what the precise timing or fallout of the next financial crisis will be. The warning signs of something big about to unfold are starting to pile up. But as an investor, you need to be prepared for scenarios you expect to unfold as well as ones you don’t. Diversification is key to surviving times like these.
Gold and silver aren’t guaranteed to go up during a financial crisis, but they can certainly help you survive it. At the end of the day, physical precious metals can’t default or go bankrupt. And at some point, perhaps soon, the cycles will turn in favor of precious metals in a very big way.
We fully expect that the next cyclical uptrend in precious metals will last for years. That’s the time frame investors should be positioning themselves for – come what may in September.
Well now, without further delay, let’s get right to this week’s exclusive interview.
Mike Gleason: is my privilege now to be joined by Steve St. Angelo of the SRSrocco Report. Steve is an independent researcher and investor who covers the precious metals and energy markets like few others, and has one of the best websites in our industry. It's great to have him back on the podcast. Steve, welcome back. It's good to talk to you again.
Steve St Angelo: Yeah, Mike. There's a lot of interesting things going in the market, so I think we'll have a lot to talk about today.
Mike Gleason: One of the main reasons I wanted to have you on today was to talk about the supply situation in silver, because it's becoming a very big story. Also because you have such a good handle on what's going on both in terms of the investment demand reported by your array of industry sources, but also what's going on with mine supplies. So there are a few out there that are better to comment on all these growing silver supply concerns than you, so thanks for spending some time with us and our audience.
Now I wanted to start out by asking you about mine supply. You have been reporting about the global silver mine production. Exactly, what does your research show in terms of how the world's major producers are doing, and what is the output been looking like over the past, say, 6 to 12 months, Steve?
Steve St Angelo: Normally, we would see this information released in different websites, but I haven't seen much of it this year. It's been surprising. Anyhow, one of the more stunning data points came out of Australia. I look at this information everyday ... Try to find out when they're going to release it. Australia actually reported a stunning 31% decline in silver production in the first quarter. In the first quarter of 2014, Australia produced 491 metric tons of silver. The first quarter of 2015, it had fallen to 340. That is a huge amount. I tried to contact the website to see if this was just a glitch, but they don't really do a pretty good job. Even if they're going to revise that number, I don't see it reviving that much. I haven't seen revisions that are that large.
We had Australia. They're down 31%. Peru is the number two largest. Australia is actually fourth. Peru so far is up a little bit. I think they're about 3½% up compared to last year and that’s as of May. Mexico, which is the largest producer ... I found this quite interesting. Mexico is down about 7% year-to-date, but they were down 12% in April and 10% in May. Actually, the first couple of months of the year, their production was up slightly. It started to decline in March, and really fell off a cliff in April and May. Mexico is down year-to-date about 7%. We don't know China's figures, because they're the third-largest producer. We don't know what theirs are, but I think their production is declining. If we just average the top three of the four here, Australia, Mexico and Peru, I think mine supply is down 6%-7%.
Now certain analysts were saying that we were going to see a fall of overall supply, and that includes recycling of about 4%. Well so far, and I think if Australia continues to show a large decline in the second quarter, I think we will see overall production from the mine supply down 6%-7%. So if you add on the scrap supply that is falling, it could be even higher, almost double the estimates that they were supposed to be. This will just cause a little bit more stress in the market as overall supply this year will fall.
Mike Gleason: These figures may not sound like a whole lot, but there is not a lot of margin out there when it comes to supply versus demand. Of course, we know demand is soaring. We'll get to that in a moment, but this could be a pretty big impact if we have that kind of deficit emerging here on the supply side. That could have some far-reaching implications, could it not?
Steve St Angelo: Yes. And I think the way we need to look at this market is that the market can change on a dime. We saw that in July when U.S. Mint sold 176,000 Gold Eagles. That all stemmed from the issues coming out of Europe with the Greek exit, and also the decline of the Chinese stock market. Investors, when they're very stressed out of the financial system, they really rapidly increase their gold purchases. Now silver continues to hit all records, demand for silver investment, but again, this is still a very small percentage of people buying. When you see this overall supply starting to decline at a time when these next couple of quarters we could see a lot of fireworks in the market as we're already experiencing. It could become even worse. Total demand could totally outstrip supply as investors really start to get worried about the financial system. It could virtually happen overnight.
Mike Gleason: What are the repercussions of a dwindling supply deficit in the face of massive demand? As they say, shortages beget more shortages as industrial users will likely begin hoarding it if they haven't already been doing so. It seems that is concerns develop that silver will be unavailable, the situation could accelerate and create some real issues. Do you envision that sort of thing happening, and how would we know if we are close to that?
Steve St Angelo: I think we're starting to see it. There have been several ... I call them tremors. There have been several huge spikes in retail silver and gold demand. That started in 2008. Of course, this all happened after we had the first initial shock of the financial system when we lost the total ... U.S. investment market system totally imploded. We're talking Lehman Brothers that was around since the Civil War. We totally lost the investment banking market. It imploded. So did the U.S. housing market as well as AIG. AIG stock went from $1,100 in 2007 to $30 in 2008. Investors need to realize how quickly things can change. Another factor is how much silver India has imported. So far, this year, India's imports from January to May are up 61%. Here is the clincher, analyst thought that now that new President Modi has eased up gold restrictions, they thought they would see a decline in silver imports in 2015, because people would buy more gold. That hasn't happened. As a matter of fact, they've bought 61% more gold.
August and September are the big buying months for Indians for their festival as well as December jewelry demand worldwide. I think the second half of the year may be even higher imports compared to the first half, which we'll record to begin with. So when we start adding up all this data ... and then this is the one thing, I think the wild card that isn't even on the radar. And you spoke about it. Institutions or let's say fabricators, big manufacturers, they purchase silver, and of course the largest demand for silver in the world is industrial demand. Even though we'll see a decline of industrial demand going forward, we will still have a lot of industrial demand. Now in an event of a shortage that goes into the large wholesale shortage, we will see institutions protecting, making sure they get silver.
But what I think the market doesn't realize is silver revalues in price and institutions may stockpile silver, not just to have it to manufacture, but it's also a gaining investment. It might behoove them to double or triple their silver quantity purchases because it's now an investment, much different than copper. Copper is a base metal. It will never be an investment per se. So I think, Mike, there are a lot of things that the market does not consider that are, let's say, explosions that could detonate going forward, that when this market unravels, we could see a tightness, where available silver will be very hard to acquire.
Mike Gleason: All of this is pointing towards the fact that we could see silver premium spike massively and almost without notice. You've been saying how many may be complacent and view the premium increases and retail minted product as unimportant, because it's mainly just a production bottleneck. That may be true to some extent or even mostly, but those same people mainly look at premiums on 1,000 ounce exchange bars and argue that that's all that matters. We haven't seen a premium increase yet on 1,000 ounce silver bars, so none of this is a big deal, they say. You've made the point that when we do see premiums rise on 1,000 ounce bars, it's basically game over. Explain what you mean there.
Steve St Angelo: I think we need to understand there are three wholesale markets. There's three markets in the silver industry. There's the retail. Let's just discuss retail when it goes to investment. There's retail investment silver market. There is the wholesale that supplies the retail, and then there is the overall wholesale silver market where silver is stored at the exchanges. They wholesale it. They get their 1,000 ounce bars or whatever, and then they make their silver products that are sold to the retailers. So, we are seeing already shortages in the wholesale market, that is the one that supplies to the retail. We are not yet seeing a shortage in the wholesale market that supplies the entire silver market. However, when it starts to move there, when it gets in there, I think it will happen very quickly. And if we're seeing between weeks let's say, four to six weeks to two months delays now on products, that's because they're waiting to get silver 1,000 ounce bars and convert them to smaller products.
What happens when they cannot get the 1,000 ounce bars? So when they say, "Now we have a shortage in the wholesale silver market," well it’s too late. For analysts or investors to say, "There's really no shortage now," and so it goes into the wholesale main market, or by the time it gets there, then it's too late, and there's very little silver available. I think on the three exchanges that's TOKOM, the Shanghai Silver Exchange and the COMEX, there's only 178 million ounces, but that's overall silver. Half of that or less than half of that is available to the market. So in a huge increase of institutions as well as large investors and hedge funds, they could totally wipe out the system in no time.
Mike Gleason: That leads me right to my next question. We've had some major fireworks in global equity markets this last week or two. Things are happening fast, but in terms of silver, you recently wrote that a massive amount of ounces came off of one of those exchanges you were just referring to there, the Shanghai Futures Exchange. Nearly three quarters of the million ounces worth of silver came out of those warehouses in a single day earlier this week, and inventories are down some 40% now from where they were just two months ago. What do you make of all that, Steve?
Steve St Angelo: I have been following this Shanghai Futures Exchange Silver inventories for a quite a long time, and they peaked at about 1,143 metric tons back in March of 2013. Then right after that, we had the huge take-down. We had two huge take-downs in April and then as well as in June and July. The overall inventories on the Shanghai of silver, it continued to fall towards the end of the year, then they increased a little bit. Then in the beginning of 2014, it peaked again, but not much. They were only 575 metric tons. Over the next several months, they fell to 81 metric tons in September. We had a build up until actually June, and then June 15th seemed to be the demarcation line where we had that event in Greece and the market turmoil. That's when the switch went off. We could see it in all the markets. The Shanghai Futures Exchange’s silver peaked in June 15th actually on the date, June 15th, at 394 metric tons, fell into the end of June, and then in one day, it fell 23 metric tons last week, which you said.
That's a nice size on the COMEX. So what does this mean? It means that we're continuing to see, not only on the Shanghai, but we're seeing on the COMEX, we're seeing a drawdown of available silver in the wholesale market. The difference is we saw this drawdown take place in 2011 when actually the COMEX fell below 100 million ounces. But the reason that fell, we saw the COMEX inventories fall, it was due to increased investment demand, as well as increased industrial demand.
Well we're not having any increased industrial demand these last past two or three quarters, or let's say six months. We're having lower. So all the drain of all these warehouses on the exchanges, is I say, due to only investment demand. This is the beginning of what I see is a global run on silver, and it will get much worse if we start seeing the continual unraveling of the broader stock market this fall.
Mike Gleason: A lot of people don't seem to understand, they see all this massive demand for physical bullion, but meanwhile we're seeing prices continue to remain weak, they got hit earlier this week once again. What do you make of that, and when do you envision that sort of dynamic coming to an exhaustion point? Is it when these exchanges default on somebody that wants to stand for delivery, and then the whole price setting mechanism system is set on its ear? What do you think about all that?
Steve St Angelo: That's a tough question. Of course, this is speculation. The reason why we're seeing so much of an increase in investment demand in the retail market is because wealthy investors, they can be multimillionaires, hedge funds, don't want to buy 1,000 ounce bars. The investment bar of choice is like the 100 ounce bar or less. I hear a lot of wealthy individuals are purchasing a lot of the monster boxes of Silver Eagles and of the sovereign coins. They're not going to get on the phone ... I hear there are large buyers coming into the market, and they're not buying 1,000 ounce bars. They're going after the investment silver. The reason we're seeing lower prices, I believe it's due to, not only is silver an industrial metal, we're still trading on this paper mechanism. When we see huge declines in the Chinese markets, in the Asian markets, the Nikkei and in the U.S., they're getting margin calls, and they're selling everything.
So initially, I see the precious metals will fall their paper price, but as the markets continue to collapse, I do see the metals bottoming and reversing. This happened in 2008. The stock market started to decline, and everything went down. The price of oil, up until today ... It's up a couple of bucks, but up until today, it was $38. When the stock markets and everything started to fall in 2008, price of oil was $140. Everything came down in a waterfall. The commodities and gold and silver, they bottomed in October and November, and they started to continue higher. The broader stock markets, they bottomed in April of 2009. I think this will much different, because we have seen such a dislocation in the broader stock market and in the commodities. They have fallen considerably. I don't think there is much more to fall. Even though we could see lower prices, I think we're still looking for a bottom, but the stock market and the broader stock markets are still way too toppy.
And as we see this unraveling, I do believe more investment demand will come in, and it will start to override that paper price. There will be a lot more pressure on the physical silver demand, and physical silver supply, that it will finally turn around the price.
Mike Gleason: I know you covered the energy markets of course very closely as well. One of the, I think, main reasons why the metals have been hurt is because they do trade like commodities at times, and oil has of course fallen dramatically over the last several quarters. What do you make of the future of U.S. oil production and supply going forward, given these low prices, now under $40 a barrel? What do you think we have to look forward to there when it comes to oil production, and what kind of impact do you think that may have on the metals?
Steve St Angelo: I just had an interesting conversation, before we spoke, with a gentleman who is in the ... Been in the oil industry for 30 years looking for oil. You know what he told me? They're not looking for oil right now. The conventional guys aren't looking for oil. He is a conventional guy. That's where the profits are. The profits are in shale, they have never been in shale. The interesting thing he told me ... Do you know what they're doing? They are looking for injection wells for water. And I didn’t realize this. The problem he sees, and that is not discussed is shale oil produces a lot of water. There's a lot water, and it has to be injected back into the ground. It can't just be thrown somewhere above ground reservoir. It's toxic. He says now they're having problems because environmental and issues of where to store all this water.
Not only are we going to see declines in shale oil production because the decline rates are so high. So when they stop drilling, and that is starting to take place, we will see a huge fall in production towards the end of this year, especially if prices remain low, and into 2016. On top of that, as production declines, less oil is being produced, but more water. They have to even find more places to put the water. This is going to be a major issue going forward. We may see a double whammy in U.S. oil production, because we may run out of places to inject this toxic water.
Shale oil production in the U.S. has peaked already. I want I want your listeners to understand that. It peaked in, it's either December, January, or in March. So, it's done. It was a nice run, but it's over. How it declines going forward will be interesting to see. So I think, according to some analysts I'm looking at, U.S. oil production will decline about 33% by 2020, and it could fall more. We're looking at a 60%-70% decline by 2025. That's 10 years away, but that puts U.S. oil production maybe at 3 million barrels (a day) ... 3 to 4. Right now, it's at nine plus. We're using about 18 or 19. What happens if the dollar becomes toast by then, and we can't just trade U.S. treasuries or dollars for oil? They're going to want real things.
So our imports are going to fall off the cliff. That's the issue investors need to realize. How do you run the system on that bill of oil? Then what does it do to all the asset prices of real estate, whether it's commercial, residential, industrial, and the businesses? The best assets to me going forward are not real estate, are not businesses, because we're just going to see the values and the activity plummet in the future. To me, gold and silver will hold their value. That's why, look at energy markets, Mike, the energy markets run the system. Solar and wind, even though they help, they're only 3% of the U.S. market, and they'll never grow to the level we need them. So, this is a liquid energy-run system. When liquid energy production peaks, we're going to be in a world of hurt. The best way to protect yourself from that is, I believe, in precious metals.
Mike Gleason: It's incredible interesting times right now, and as crazy as it's already been, it does feel like we may be on the verge of something significant happening. We'll have to wait and see. And of course, we would love to check in with you again very soon to get your great insights as it all unfolds. Before we let you go, Steve, tell our listeners about how they can learn more about the SRSrocco Report, what it is that they'll find there, and what you've been working on?
Steve St Angelo: Any of your readers or listeners that want to come to and check out my site, it's the SRSroccoreport.com. I put out two to three articles a week discussing energy, the precious metal industry, the mining industry ... I will be putting out the quarter two break-even for the primary silver mining industry. I don't think it fell that much. With the lower price now in the silver in the 14-15 range, I believe most of the silver miners now are losing money.
So I encourage our readers to check out the site. I still have a Silver Chart Report that I put out last month. It's got 48 charts. If anybody wants an overall look at the silver market and industry, this is a great report. I take each chart, and I explain it in five different sections of the silver industry. So to get a person who is new into the industry and the market, that's a great report to check out. I appreciate the time. Hopefully we can do this again shortly.
Mike Gleason: Absolutely will. Thanks again, Steve. We'll be keeping a close on your stuff there at the SRSrocco Report. You say two to three articles a week. It seems like it's been a lot more than that recently. I know you've been very busy, and it's always fantastic stuff. We really enjoy it. And hope you enjoy your weekend. Get some rest. We look forward to catching up with you again real soon. Thanks again, and take care.
Steve St Angelo: You too, Mike.
Mike Gleason: That will do it for this week. Thanks again to Steve St. Angelo of the SRSrocco Report, one of the best metals market-related sites in the entire industry. Be sure to check it out.
And check back here 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.