Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
Coming up we’ll hear a fascinating interview with Steve St. Angelo of the SRSRocco Report. Steve gives his unique and studied perspective on how peak energy is coming sooner than we think and is ultimately going to be a key driver for higher gold and silver prices. Don’t miss my interview with Steve St. Angelo, coming up after this week’s market update.
As investors continue to shuffle their portfolios in preparation for the coming Donald Trump era in Washington, precious metals markets are being overlooked. Gold and silver sold off in November as the stock market surged to new highs while bond yields spiked.
Since Trump’s election, the rate on the benchmark 10-year Treasury note has shot up by 58 basis points. Effectively, the bond market has already done more tightening than the Federal Reserve will do at its next meeting. The Fed is expected to raise short term rates by 25 basis points, or a quarter of a percent, when it meets on December 13th and 14th.
Any hopes that Donald Trump would put the brakes on the Fed or pursue sound money policies were dashed in recent days. The president-elect had reportedly considered former BB&T CEO John Allison for Treasury Secretary. Allison is an opponent of bailouts and other interventions, a sharp critic of the Federal Reserve, and an advocate of sound money. But Trump passed over Allison in favor of a more conventional pick.
Nightly Business Anchor: President elect Donald Trump's economic team is taking shape. Former Goldman Sachs banker Steven Mnuchin was tapped to be the next Treasury Secretary. Investor Wilbur Ross the next Commerce Secretary.
NBR Reporter: Treasury Secretary designate Steve Mnuchin and Commerce Secretary designate Wilbur Ross. Both appear to walk back from some of Trump's most extreme rhetoric from the campaign. The two even praised Fed chair Janet Yellen.
Wilbur Ross: I think that she dealt with a very difficult situation and did a reasonably good job. I do.
CNBC Anchor: So she may serve out her term, or that she be re-nominated?
Wilbur Ross: That's really a question for her and for the presidents, not a question for us.
Steven Mnuchin: I will say we do have two Governor spots to fill, and that would be high on the priority list.
The president-elect’s cabinet selections have been largely establishment types rather than change agents. Trump may even opt to reappoint Janet Yellen as head of the Federal Reserve when her term is up in January 2018. It appears that the Trump presidency will neither embody the worst fears of his critics nor fulfill the greatest hopes of his supporters who voted to “drain the swamp” in Washington.
The upshot is that if the Trump administration won’t pursue sound money policies or get the deficits down, precious metals markets ought to fare well as a result. Copper and other industrial metals are already faring well in anticipation of greater spending on infrastructure. Crude oil prices surged 11% this week on OPEC production cuts. And higher rates of inflation are being priced in by the bond market.
Inflation protection may become a big concern for investors in 2017. But it isn’t yet. Gold and silver markets are struggling from a paucity of safe haven demand and a strong U.S. dollar on the foreign exchanges.
So far the only precious metal to see a big Trump bounce has been palladium. The palladium market hit a new yearly high mid week before backing off on Thursday and again today. As of this Friday recording, palladium shows a small weekly gain now of just of 0.3% to bring prices to $750 an ounce. Its sister metal platinum is up now 2.9% this week to trade at $937 thanks to a rally this morning.
Turning to silver, prices have traded range bound for the past two weeks, perhaps now finding some kind of floor. Silver currently comes in at $16.74 an ounce, up 0.9% since last Friday’s close.
Meanwhile, gold is off 0.8% for the week to bring spot prices down to $1,176. The gold market has suffered from a drawdown in demand from India in recent weeks. The Indian government is waging a war on cash by getting rid of higher denomination bills, putting withdrawal limits on bank deposits, and pressuring citizens to move to electronic transactions. Amidst the cash crunch, retail demand for gold is down during what is normally a strong time of year for Indian buying.
Those who are looking to buy precious metals for the holidays will find plenty of bargains thanks to the dip in spot prices. Money Metals Exchange stocks bullion for all budgets – from copper rounds that can be stuffed in stockings to pure 24-karat gold for that special someone. If you’re looking for a gift that comes ready to wrap and put under the tree or inside a stocking, consider our Silver Eagles that come enclosed in their own individual “Merry Christmas” capsules.
Looking for something a bit more unique? How about one of our $25 Book Safes for discreet storage or a Swiss-made pocket knife inlaid with 1 gram of pure gold. The gold Swiss Army knife comes in an attractive display box and makes a classy gift for less than $200. It could also make a great addition to your own collection.
Whatever form you choose, we hope you’ll enrich loved ones with the gift of hard money this holiday season. Precious metals are virtually guaranteed to bring a bigger smile to their faces than paper cash or plastic gift cards. And bullion products can be cherished for years to come. Unlike most gifts, precious metals stand to become more, not less valuable over time.
Well now, without further delay, let’s get right to this week’s exclusive interview.
Mike Gleason: It is my privilege now to welcome in 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 the entire industry.
Steve, welcome back. It's good to talk to you again.
Steve St Angelo: Yeah, Mike. Winter's here. It's going to be an interesting winter and I believe 2017.
Mike Gleason: Well, before we get into some other things that you and I've been talking about offline, which I'm really excited about covering today, I want to get your just thoughts on just the initial market reaction since the presidential election. Obviously, it's been several months since we've had you on last. First off, have you been surprised with how the markets have reacted since election Tuesday?
Steve St Angelo: That's a good question Mike. I think there's two ways to answer that. Fundamentally speaking, it's insane what's happened with the precious metals and then the stock market is now continuing up towards the moon. Based on fundamentals which, we don't use anymore, we use a lot of other things, hot air, hype and money printing. So based upon fundamentals, what's happened to the price of gold and silver is completely insane. Now, if we look at it on a short term financial, highly manipulated market trading wise, it makes some sense because what some of the Trump presidency policies are going to be it's going to impact the dollar in a more favorable light. It hurts the Asian and third-world country's economies. So we can see it makes some sense in a highly manipulated economy or market. In one way, the fundamentals always win out in the end. It's insane but, on the other, Mike it makes some sense but this, to me, is more short term.
Mike Gleason: Steve, you study the data on silver supply versus demand as closely as anyone we know. You recently wrote an article on peak silver and the ongoing supply deficits. We're going to talk about how peak energy also relates to this here in a moment. But the data shows that the market has been in deficit for years. Silver mine output is less than silver consumption. If you can, give our listeners a quick overview on how this is possible. Why has it been possible for demand to outstrip supply on an ongoing basis? Where has the silver been coming from if not from mine output? How long do you think supply deficits can continue?
Steve St Angelo: This is the first year that, and let's start for production, this is the first year that global silver production is going to decline. It's been rising since like 2006. The last ten years it's gone up every year, some years more than others. But we're going to fall about half a percent. They also forecast which is GFMS Thomson Reuters, they put the world silver survey out. They forecast we're going to see continued lower production. I'm not saying falling off a cliff yet but that's what they see. Now what's interesting, when you've got production, then you have demand. We've been having deficits. Now, there's physical deficits, which are when you have all the supply and then you reduce all the demand, and then you have to include changes in exchanges like the COMEX or ETFs.
Whether the silver's going in those institutions or not, that's what the next level that they deduct or add to. Well, last year it was 185 million ounce deficit Mike. So if we look over the last, according to my analysis, since 2004 it's been almost a billion and a half ounce deficit, cumulative. We've had deficits since 2004. Well, looking at older work by GFMS, there were surpluses during the 80's and 90's. Governments were dumping silver on the market, the Chinese were. Actually, the Chinese were dumping silver in the early ... in Russia up until, let's say, the middle of the 2000's. So there was a lot of silver being dumped into the market and there were a lot of surpluses from investors who invested in the 70's and in early 80's. They started selling it off.
A lot of this was moved and it actually supplemented this 1.5 billion ounce deficit. And there's probably still more out there but they say, GFMS says we're going to see even more deficits because supply is going to continue to fall and demand is probably going to remain strong. I don't look at supply and demand on a yearly basis. We had a little more supply or a little more demand this year. I look it as an overall trend Mike. And what this trend is telling me, it continues to be in a deficit. It's scraping silver from different areas around the world, from different holders into this market. I don't think there's a lot of buffer left like there was 10 or 15 years ago. So when we see more production decline, as well as more demand remaining strong and deficits, I think in the future it's going to impact prices. Not because of supply and demand because silver really is a go-to asset. Just these trends are showing that people are waking up Mike. A lot of investors are waking up to buying silver. That's the trend I'm looking at.
Mike Gleason: Do you think there's going to be some sort of a tipping point in the future where people sort of recognize that, okay, maybe silver supply has peaked and then, at that point, do we get a run on silver? Do these industrial users start hoarding it because they're worried about not being able to have it for their products and so forth? Is that sort of thing out there in your view?
Steve St Angelo: It's a possibility. I know Ted Butler… and I started reading Ted Butler years ago and this was one of the things that he's always advised what would happen. We would see this huge movement of industrial suppliers coming in to get silver, as well as big investors, so it could be and private. It could be like a triple whammy. That's possible. And I think the issue is the peak oil, which we're going to talk about, and peak silver, peak copper. You can put peak anything. I don't think peak stupidity will be added to that though. We'll continue to get more stupid as we go on, but I think the issue is yes, we will see some kind of buying.
It's not because they're just trying to get available supplies for industry. I think going forward, and we'll talk about this in a minute, we're going to see production decline overall in the world because of energy production. But I do think investors, as well as institutions, are going to wake up. Either if we're still producing silver, as in manufacturing, or as investing in a store value, yes, we're going to see that moment where the light bulb goes on. I called it precious metal religion. I do see that in the future.
Mike Gleason: Now, you've got a unique perspective on mine supply and the concept of peak silver as it relates to peak energy, and just how much energy ties into all of this. Talk about this here Steve and share your philosophy and how you've arrived at these conclusions.
Steve St Angelo: Mike, simply, we can spend an hour and a half talking about this, but I have to wrap it up quickly for you, easily for your readers and listeners. Peak oil means that there's a bell curve. Most wells, actually all wells, all fields in the world peak and decline. We've just been tapping into more expensive ones. And then we got into shale where we're drilling thousands of wells now. I call it the drilling hamsters. Now the peak oil theory did not input the energy returned on investment. That continues to fall. In 1930, the United States was producing a hundred barrels of oil for the cost of the energy of one. Shale comes in at five to one, so it's really falling. However, the other thing we didn't put into this equation was this thermodynamics.
The thermodynamics by the Hills Group in Louie Arnoux show that there's only a certain amount of energy in a barrel of oil. And a third of it you don't even use it. It’s waste heat, so you can only tap into about two-thirds, about, approximately two-thirds. Well, let's say 1900, most of that oil was making it to the market. Now, it costs more and more energy to produce that barrel. Well, there was an inflection point in 2012 and that was the oil ETP model that was designed by the Hills Group. They see the price of oil continuing to fall towards $12 a barrel in 2020. Now, you see, that goes against the whole idea of supply and demand. If the price falls, well then, there'll be more demand.
The problem is you have to look at this like a car. You buy a brand new car, you spend 30 grand. Well let's say the car is 15 years old, the market price is at 7 grand. Why? Because all the parts, all the embedded energy in the radiator and all the computer parts in basically in that car have depreciated. It's not worth 30 thousand. Now, some people would say well, if there's only one car in the world, then someone might bid it up, but that's not normal market pricing. So the falling net energy and it's really falling now. They say within a decade, 75% of U.S. gas stations will be closed and the U.S and global oil industry will have disintegrated. That's how quickly it's going to fall apart.
The problem is this falling oil price is going to totally gut the market. And what that's going to do, it's going to do the same thing to silver production as well as gold production and copper production. So this is the analysis that I'm looking at and the problem is, you don't spend more than $12 on a barrel when the quality of it isn't worth it. This is the problem with supply and demand as well as pricing. It's based upon the cost. So Mike, going forward, I think we're going to see a collapse of oil production. We're going to see a collapse of metals, base metal production. And that's going to impact gold. That's going to impact stocks, bonds, real estate in a negative way and gold and silver in a positive way. That's basically the easiest way I can put it.
Mike Gleason: Now we're talking about the federal deficits and just how much it's been exploding and you have some interesting things to say on that as it relates to gold and silver. Talk about that.
Steve St Angelo: Okay, Mike. The debt and deficits everywhere is insane. And before I mention that, I just want to let your listeners understand. The three major oil companies in the United States in 2011, they were getting paid a hundred dollars a barrel. They, in the first six months of the year, after they paid all the capital and all the dividends, they had 16 billion left over. These are the three majors, Chevron, ConocoPhillips and Exxon. The first six months this year, after they paid their capital and dividends, they were 18 billion in the hole. And these are the majors. Forget the shale; they're in bad shape. These are the majors. I wanted your listeners to understand how bad this situation now has become for the major oil industries. They're the ones that are supposed to be profitable. And their debt now is increasing.
Debt's increasing everywhere. If we look at how debt is compared to gold and silver, I looked at the interest on the U.S. debt last year. Mike, it was $402 billion. That's what we paid in interest on the debt. How much could that buy? That could buy three years worth of gold supply in just our interest on the debt. That's actually more than all the gold that we supposedly have in reserve, which is 8,100 tons. Now, that's the interest. What about the deficits. If we look at the deficits from 2011 to 2015, five years, it was 4.2 trillion dollars in U.S. deficit.
How much could that buy? That could buy 30 years worth of global gold production. Basically it would buy all the gold invested in the world, central bank and private, which is about 3 billion ounces. It would also buy all the silver produced since 1950, 26 billion ounces. These are just our deficits. So this is the issue. The situation has become completely insane. And the reason why gold and silver have been selling off is because it's insanity. People are moving into... they think the stock market's going to continue higher. Right now, gold and silver are the go-to assets. The market hasn't figured it out yet. But this is, and I just wanted to show using those two examples of the interest on the debt, as well as the deficits, how much that could buy in gold and silver and how truly undervalued they are.
Mike Gleason: Markets seem to be in sort of a honeymoon period following the election of Donald Trump investors are more optimistic about the prospects for the economy. Some of what Trump is planning does give reason for hope, tax cuts for example, but he is inheriting some massive structural problems in terms of debt that we just talked about. And markets are completely addicted to Fed stimulus. It doesn't appear currently that he is planning to confront those issues. In fact, we may even be looking at borrowing and spending more at this point. Over the long run, what do you think a Trump administration is likely to mean for metals over the next few years, as this debt crisis continues to come to a crescendo?
Steve St Angelo: In the short run it's been negative, but I think in the long run it's going to be positive. And I say think, everyone has their own opinion. Actually, I think it's more based upon not what Trump does. There's been a lot of speculation that Trump may want a gold standard. It doesn't make any sense for Trump wanting to do that. His newest treasury U.S., I guess, Secretary of Treasury is thinking about a hundred year U.S. Treasury. I think that's more of what they're going to do than have a gold backing. But Trump has a lot of good ideas. I don't think he's going to get a lot of them done. It's not going to be his fault. But there's just too much debt in the system. That is the issue. There's too much debt.
He wants to do this massive infrastructure program. Where is he going to get the money to do it? We don't really have the energy to do it either. We're still importing more energy than we were a year ago, more oil. I guess long term in the presidency, I see the value of the metals moving higher. I look at it more based upon the energy situation. But I think Trump is going to be doing some things. Some of the things that he's going to do with his policies will impact the metals, I think more, in a positive way, but his hands are going to be tied because of the energy and the debt Mike. I think Trump may go down as the sitting duck president that came in when the collapse happened.
Mike Gleason: There's certainly this notion out there among the mainstream financial world and I think we both would probably both agree that it's a false one, but this idea that gold and silver representing a much needed and important safe haven assets, is a dead and irrelevant notion at this point. Have gold and silver been relegated to barbarous relics? If you look at the price action, I think a lot of people are thinking that we don't need it as an important asset anymore. Is that thinking inaccurate in your view Steve?
Steve St Angelo: Yeah, it goes along with what I call the 45 years of fiat monetary amnesia, when Nixon dropped the gold dollar peg in 1971 and Americans calling forgot about gold and silver. And you see some of these videos ... I think there's one gentleman named Dave. He goes around trying to pawn off either a chocolate bar or a silver bar. Ninety-nine percent of the people are going to take the chocolate bar. That's really good U.S.A. brainwashing done really well, and so people think their assets or investments are in stocks, bonds and real estate. And those all worked when the price or the value or production of oil continued higher. Now that it's peaking and declining, those assets won't hold their value.
In time, we are going to see gold and silver, and actually Mike, they've always been the store value. We just forgot about them. It hasn't changed. We just had this great net energy from oil that's kind of allowed us to run this fiat monetary system, but the debt in the United States has gone exponential. It's gone exponential since 1970. So if we look at exponential charts, any scientist would tell you, well, they don't last forever. Once you head up exponentially, I mean it was, I think 300 billion in 1970. That was the U.S. debt. That's all it was. Now it's over 19 and a half trillion. If you plot that on the line, it's an exponential line. So exponential functions collapse, so this system will collapse and when you start heading up straight, that's when things really start getting volatile, like they are now.
You see the price of oil going up $3 because OPEC's going to drop production or they say they're going to drop production. I think going forward we're going to see more volatility but, yes, nothing has changed with the fundamentals of gold and silver. We just had a little more, let's say, a little more time for the insanity to go on because of the debt and money printing.
Mike Gleason: As we begin to wrap up here Steve, what advice do you have for people and what is maybe that one thing that you're focusing on? We talked a lot about a number of issues here. What is the main thing that you're going to be focusing on over the next six, 12, 18 months as things begin to unfold here?
Steve St Angelo: This won't be a surprise. It's going to be the energy. The energy is the driver of the economy, whether it's oil, natural gas, coal, hydro, nuclear… renewables won't really matter, or human labor, animal labor. That's the energy. The store of value has been for two thousand years, gold and silver. There's a lot of digits out there, a lot of highly inflated digits that the GDP, the stock market, the retirement market, global assets. Those are all inflated. They're not based upon anything. There's based upon a highly inflated debt which, I didn't mention this… since 1980, the Dow Jones has gone up 22 times, actually I think it's, yeah, it's 22 times. The U.S. debt has gone up 21 times.
Well, it doesn't take much of a brain surgeon to figure out the debt has increased almost the same ratio as the stock market. When you look at these numbers, there's no hiding them. It's all debt based. So I'm going to be looking at the energy and how it's going to impact things going forward. Right now, I think we're going to continue to see the gutting of the U.S. and global oil industries. Even if prices would go up a little bit higher, they're not going to stay there because the value of the energy just isn't worth it anymore. That's what people need to realize. It doesn't have anything to do with supply and demand. It has to do with cost of production. That's also what I'm going to focus on because I have one last thing that I want to say.
I looked at the top gold miners, Barrick and Newmont. In 2000 to 2012, their cost of production went up 470%. In 2000 to 2012, the gold price went up 498%. Well, let's throw out all the supply and demand. Let's just throw it out the window. The basic cost or the basic price of gold was based upon a 470% increase of the cost of production of gold. It's that simple. So when we start looking at the market a little bit differently, we have to realize that there isn't much gold and silver out there as stores of value. This is the most explosive thing that people don't realize. It's based on science, it's based on thermodynamics. It's not really based on supply and demand. That's more what I will be talking about on my site and writing articles about. Your listeners and readers are more than welcome to check it out.
Mike Gleason: Well, great stuff Steve. On that note, for people that are unfamiliar with the SRSrocco Report, tell them what it is they'll find there if they go to visit your site.
Steve St Angelo: Thanks Mike. The website is called the SRSrocco Report, basically SRSroccoReport.com. I put out between two or three articles a week. I view it from supply and demand because it gives us an indicator of what's happening. I also talk about what's happening in the energy markets, as well as the economic markets. It's all important. I've got some reports I put out, people can check out. I look forward to seeing what's going to happen in the energy markets going forward. I think we're going to experience what is known as the Seneca Cliff, Mike. That is, a shark thing. Lucius Seneca was an ancient Roman philosopher. He says, "The way to growth is slow and sluggish, but the way to ruin is rapid."
I see the situation going forward falling like a shark fin. It's going to happen very quickly. It's not going to happen slowly. We're going to see things change quickly. Is it next year, is it five years? It's going to happen within the next five, ten years. And possibly, it could happen within the next five. People need to be prepared for that. That's what I'm trying to write about on the SRSrocco Report site.
Mike Gleason: Well, it is fantastic stuff. I can vouch for that. You have a very unique perspective. You cover things quite a bit differently than a lot of others in our space. We really appreciate that. Appreciate having you on. Look forward to doing it again. Hope you have a great weekend, excellent holidays if we don't chat before then. Thanks very much Steve.
Steve St Angelo: You too. Have great holiday and we'll look forward to see what happens next year.
Mike Gleason: Well, that will do it for this week. Thanks again to Steve St. Angelo of SRSroccoReport.com, one of the best metals and energy related sites in the entire industry. Be sure to check that out.
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.