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Thursday, December 1, 2022


Wall of Worry Wednesday – Time to Climb Again?

Zeroxzero said it best last night:

Reading the apocalyptic tone in many of the comments today — the imminent demise of Japan, the imminent demise of France, the inevitable implosion of China, the Demolition Derby of Euro, Yen, Dollar and Swissie, and the collapse of gold —  all viewed against the fiery background of a Middle East abandoned to war because we don't need its oil anymore, a Brazil, Australia, Latam & Africa whose commodities are now worthless, and an Asia and India whose cheap labor has become superfluous — I have been given the sense that we are now riding the Fifth Wave up the Limpopo with Yellow Jack

Yellow Jack is another word for Yellow Fever, a horrible mosquito-delivered disease that had been known to wipe out entire crews of ships traveling along the Limpopo river in Africa.  It's great imagery for the doomsday scenarios that are suddenly being painted by the MSM to panic the sheeple into making as many poor investing decisions as possible while the market undergoes a minor correction.  

Original_14294724Indeed gold collapsed overnight – all the way to $1,222.90 and this morning we took our first long on the gold futures in ages (/YG) at the $1,230 line as this is just beyond ridiculous at this point and we already caught a nice $5 pop for a $166 per contract gain and that lets us take a quick profit and reload for the next test of $1,230 – we can play this game all day if they want!  

As I noted to our Members, GS, DB, SC, SocGen and UBS have all come out with notes lowering their gold forecasts this week – which seems a bit much for coincidence but this is the kind of collusion that is routinely ignored by regulators so, rather than complain about it – we just bet along with the crooks and load up on gold while the sheeple are stampeding out of it.  

Well, not so much gold as that may still fall to $1,100 or even $1,000 in a proper panic but gold MINERS are getting very cheap, like ABX (which we have in our Income Portfolio), which has fallen to $15.50, which is the lowest it's been since 2002 – when gold was $450 an ounce!  ABX's market cap is now under $16Bn, which is interesting as they have 140M ounces of proven reserves.  Even if you value that gold at an extracted $100 an ounce, that's still $14Bn!  Also, NEM made a PROFIT $4.5Bn in 2011 and gold started that year at $1,309 and ABX made a profit of $3,630 in 2010, when gold bottomed out at $1,155 in July.  

NEM is suffering a similar collapse, down to $27.50 pre-market but still way above the 2002 lows so not as much fun to play but HMY is $3.35 and that's LOWER than it was when gold was $450 an ounce.  Poor NAK doesn't even sell their gold yet but they are down to $1.90 a share and make a great speculative play (an old favorite of ours before they shot up to $20 and got silly) and let's not forget silver, which is being trounced along with gold and sending AGQ down to $15.55.  

As you can see from this Zeal Chart, $1,222 is right at that 12.2-year average low (red line) and that has only been brought down by the recent massive panic from $1,350.  So we're playing for a recovery to about $1,350 and then we'll go back to not caring about gold but this is too much fun to miss out on and already we got our re-entry at $1,230 on /YG Futures – and this time we have a $5 cushion to play with so we can trail our stop $2.50 and go for it!  

AGQ is a crazy silver ultra fund and usually we avoid it like the plague (or Yellow Fever) but this is where it bottomed out in 2009 and then it went to $180 in 2011 so kind of fun since we can sell the 2015 $10 puts for $2 and that pays for the Jan $19 calls at $1.70 with .30 to spare, so not bad for a small poke at this level (silver $18.50).  Unlike gold, silver actually has some industrial use that should keep it from total collapse.  

Keep in mind, I'm no gold bug.  In fact, just this past fall we were playing GLL (ultta-short gold) when it was in the $50s (now $100+) and we even had a Member quit because I was too much of a gold bear back when it was $1.850 and I refused to let anyone play it to $2,000 and called the whole thing a big scam at that time as well.   That's because gold has no real value – it's not much better than BitCoins in that regard but it is a 10,000-year tested means of exchange in human civilization and that's the one we do live in so it should be taken as seriously as any other silly currency people choose to use to exchange goods and services for pieces of paper or shiny bits of metal.  

It's the laborers that are idiots for being fooled into accepting worthless script and shiny bits of metal in exchange for a day's work – not the people who trade them.  That's the papers, I mean.  At the moment, it's not legal to trade the laborers – you still have to pretend to pay them a living wage but you can tie them up with contracts that make it impossible for them to run away and work for someone else if they realize their labor is being undervalued so it's almost as good as chaining them.  

Anyway, I already got into the inequities of Capitalism this week so we'll just leave it at the fact that nothing has changed as of Wednesday morning so far.  Of course the effect of not paying workers a living range has Mortgage Applications off another 3% this week and that's a streak that's been going on since mid-April.  Housing is a big part of this economy and, if we don't pay the workers who live here enough money to buy houses – then the economy suffers.  My children understand this concept – why doesn't Corporate America or the Government?  

The slowdown in housing and consumer spending had knocked our Q1 GDP down to 1.8% from 2.4% as personal consumption (70% of our GDP) fell from 3.4% to 2.6% while the GDP was being revised.  Real non-residentail fixed investment (factories and stuff) flatlined in Q1 from up 13.2% last Q and residential property slacked off as well.  In short, the velocity of money is still near zero and the economy can't get anything going, no matter how much cash the Fed pumps into it if that's the case.  That should goose TLT back to 110 at least (we're long) – just in time for the 5-year note auction today.  

Now, is a lower GDP the kind of bad news that's good news because it keeps the Fed in play?  Gold is already at $1,245 for a lovely $498 per contract gain on our second bounce off $1,230 and now we'll play for a break over the $1,250 line (unless we get a test of $1,240 first) but the Egg McMuffins are paid for and we can begin our trading day. 

In fact, I think we deserve croissants this morning!  


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IWM had a nice sell off. Have to thank all the bad rappers today because you got me to sell before the drop.

A little wonkish for me but some possible explanation for gold prices:


If our theory is correct (and we stress it is only a theory) the above suggests that strategic renminbi overvaluation relative to the dollar is currently only intensifying, mainly by means of RMB liquidity denial. The more the Chinese overvalue the renminbi, the greater the effective subsidy being dished out to domestic Chinese gold buyers.

This explains the oxymoronic situation of falling prices and growing demand.

But since dollar markets are now pricing in a decline in dollar terms — gold behaving like the anchor goldbugs claim it to be (hurrah! score for them on that front)– it’s arguably becoming harder to keep the renminbi overvalued in relative terms.

Which means China’s major undoing could turn out to be the gold market, the major absorption of gold by the country a signal that trust in the renminbi as a store of value is waning.

If this is true, something will have to buckle soon. Either the renminbi will be forced to devalue, popping lots of dollar shorts as it goes — behold, dollar-denominated defaults galore — or China will finally be forced to release its USTs so as to avoid the messy fiasco and to honour its dollar debts, and prove it’s a credible country after all.

To clarify, we’re not arguing the Chinese are using gold to manage the exchange rate, rather that gold is sending us an important signal that a great unwinding of the CNYUSD relationship may be upon us very soon. Also, — more importantly perhaps — that in the game of global currency wars, the Fed has come out on top.

What happens next, of course, depends entirely on the degree to which China provides the liquidity its system is demanding and on the amount of dollar debt there actually is in the system. If it responds, the great unwind may be upon us quicker than we expected (which might explain why it’s so reluctant to do so). If it doesn’t… gold prices could be in for a rough ride in renminbi terms for some time still.

I guess when you are wrong, you need to attack the other side with bogus arguments:


I’d say that it’s actually a form a flattery. If Keynesians had made a lot of bad predictions in recent years — if inflation or interest rates had soared, if austerity had produced prosperity — the other side could go after what we actually said and say. But reality, it turns out, has a well-known Keynesian bias. So the people who’ve gotten everything wrong are reduced to attacking an economic doctrine that has worked pretty well by misrepresenting that doctrine, and claiming that it’s stupid and absurd.

By the way, the man who really brought Keynesianism into the classroom — who was responsible for what we now call the “Keynesian cross” — was Paul Samuelson. And while arguing from the qualities of individuals isn’t the main way you should assess anything, still: maybe you think I’m stupid (a remarkable number of people apparently do believe that), but do you really imagine that Paul Samuelson was an idiot promoting a moronic set of ideas?

Anyway, as I said, ultimately being caricatured like this is a compliment.

These 50 DMA will soon be in play!

Wappler / Newt:  I'm with you on the REIT idea.  Haven't bought any yet, but the evidence keeps strengthening that they are a good value.   Here's some excerpts from a GK Research article today, which takes a fairly balanced approach, and provides a few criteria that need to be watched closely, because "bullish housing" is no slam dunk just yet:
"The Case-Shiller house price index rose 12% YoY in April. The more timely median house price index rose aggressively in May and is now up 15% YoY. Amazingly, this brings median house prices to just about 10% below the 2005-06 peak levels."

"The worry is that this rebound has been driven less by rising incomes than very low interest rates. Cheap financing had the desired impact after the inventory overhang reduced and unemployment started to fall. If the labor market continues to improve it should eventually translate into rising incomes, but this has not occurred yet. So for the time being, we have to conclude that the current rise in house prices is the start of another bubble…

"[L]ike any good bubble, this one is highly dependent on easy money. But how low do mortgage rates need to be to keep the party going? To answer that we have reverse-engineered the National Association of Realtor’s affordability index. The components necessary to project the upcoming May reading were at hand—we expect it to be… the lowest since mid-2010. This will lead to headlines like “US Housing Affordability At Three-Year Low!” Affordability will still be very high… but these moves and the resulting headlines will rightfully lead many to ask, what if yields go higher still? The answer depends on how much yields rise, how quickly, and what incomes are doing at the time."
"Consider if: Yields rise another 50bp this year, and then settle there (i.e., 10 year treasuries rise to 3%, and 30 year mortgage rates rise to 4.5%). By our rough calculation, house prices would still have another 20% upside potential. With those interest rates, and all else equal (namely, house prices and incomes), the affordability index would drop to 155—the lowest since 2008 but still higher than at any point in history before 2008. To get back to “normal” affordability levels, with those interest rates, prices would also need to rise 20%—which is how we get our 20% upside potential… (we use the levels that proved remarkably stable from 1993 to 2004). "

What if yields rise 150bp this year (i.e., 10 year treasuries rise to 4% and mortgage rates to 5.5%)? With such interest rate increases, and no significant growth in household incomes, housing affordability would fall nearly back to the 1993-2004 range—leaving no valuation tailwind for the housing market. This would stop house prices stop dead in their tracks…Our core scenario is somewhere in between. We expect 10-year treasury yields to rise 50bp this year to around 3%—and then rise more in the following years, but only after incomes are also on the rise. The critical nuance is that these higher interest rates are not reached until after income growth returns, providing its own support to house price appreciation. Of course that kind of support is more gradual, but it is also more sustainable and healthy for the economy."

Interest rates/Zero,
Calculated Risk does not think the interest rates are THE driver for home prices:
"However, a key difference now compared to earlier periods, is that there is more investor buying. And investors will compare their returns on different investments – and rising rates will probably slow investor demand for real estate, even if they are all cash buyers.   But, in general, I think rising rates might slow price increases but not lead to a decline in prices (we might see some seasonal declines)."

What I don't understand is no matter what ABX seems to fall 1-2%+ more than other miners almost ALL the time! This has been the worst 4 months in my life portfolio wise.  my portfolio has been decimated.i  Keep doubling down waiting for a bounce in these miners to rebound and it is killing me. 

jromeha–I know how you feel.This past week has been the most painful one I have ever experienced thanks to ABX and GDX too. There has to be forced liquidations because of what gold is doing. It has been brutal. Phil always says you shouldn't sell puts in something you don't want to own (at a discount, of course). I understand the logic and strategy but it still feels terrible when you short a put in a stock or fund and then it drops 50% or more on you and then you try to convince yourself that you really don't mind be a long term investor. I hope these dogs with fleashave bottomed.

Jabo- you better come to the Vegas meeting. I already know what the first group toast will be – FU ABX!!!!

You can call me double down. 

Misery loves company.  Me, too, on ABX.  I bailed last week, entered again by selling $12 puts, and then realized I was out of my mind given all the preferable trades out there.  Yah, someday.  Maybe tomorrow.  But this isn't supposed to be religion.

Zero- yes, it does. Seriously though, I don't understand why/how ABX falls more than the other miners – It fell 2.4% more than NEM, 1.8% more than HMY, 4.5% more than EGO, .6% more than IAG, 3.7% more than GG, and 3% more than Kinross. This is ridiculous and it happens every day. I get the fact miners are going down but the ABX premium seems to be an extra 2% to fall on down days and 2% less of a recovery on updays. Driving me loco in the cabeza. 

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