The Beginning of Bank Seizures
One can be successful gauging the charts, while others can find success using different valuation methods.
However, no strategy is more important than using world news to our advantage.
On June 8, in my letter, “A Major Scam Revealed,” I said to expect gold and silver prices to climb in the short term.
Here’s a chart of GLD (gold) and SLV (silver) since that letter:
In many of my letters this year, I said to expect the price of oil and gas to climb in the short term; that “the price of energy will increase for every American.”
Here’s a chart of the S&P GSCI® Crude Oil Index:
I made these calls because I took the time to understand the major events that are happening around the world. That is why I often write about things that may not appear, at first glance, to have anything to do with investing.
Why Things Move
I expected higher oil prices long before the resurgence of the Iraq terror outbreak. I talked about why Russian advances* in the Eastern Hemisphere would drive the price of oil and gas higher, and why the United States’ shale boom and LNG aspirations would do the same.
(In time, I expect that Russian advances will drive the price of uranium higher as well. When uranium prices move higher, it won’t be a gradual rise; it will be an explosive climb up. China is already racing to complete the build of the world’s most powerful nuclear reactor. With its recent gas agreement with Russia, I expect further agreements on uranium concessions will be made.)
Recently, I talked about the unwinding of Chinese commodity financed deals (CFD) and how it could temporarily lead to lower base metal prices as physical inventories are sold off.
Conversely, I said the unwinding of China’s CFD’s could lead to higher precious metals prices as the unwind forces those involved to cover hedges and ensure the underlying physical inventory is accounted for.
And since the underlying physical inventory used in these CFD’s may not actually be there, it could lead to an increase in purchases in the physical market as hedges cover; thus, leading to higher prices in the paper market.
“In 2013, when Chinese physical buying hit an all time record and overtook India as the world’s largest gold consumer, gold tumbled nearly 30%.
It was also a year where gold-backed funding deals rose to an all-time high.
Clearly, the surge in physical gold demand in China (and all over the world, including central banks) could not have forced gold prices to tumble.
I have discussed the unloading of paper gold by Western Banks many before many times.
But what about the Chinese?
Could the Chinese have unloaded “hedged” paper gold assets in the futures (paper) market, intentionally forcing the price of paper gold down, as it – and its billionaire citizens (with strong ties to its government) – purchased physical gold at its fastest pace ever?
All signs point to YES.”
Could the recent activity in gold be a result of unwinding CFDs in China? Possibly.
Either way, gold and silver have moved higher.
What do you think of gold now? Are you tired of it? Are you still invested?
Further Moves Ahead?
China’s private sector gold demand is expected to be the same as it was last year at around 1000 tonnes (when it surpassed India to become the world’s biggest consumer of gold.)
But there is a problem.
Given the amount of miners that have ceased operations as a result of a slumping gold price, new physical inventories will be that much harder to find.
China is expected to produce a whopping 14.5 million ounces this year – less than half of what it is expected to consume in private demand.
Where will the rest of the supply to cover the demand come from?
This is where the whole supply and demand fundamentals strategy takes yet another backseat. Despite all you hear about mine shut downs, gold production is actually expected to hit new records this year.
Furthermore, we have seen the supply and demand gap grow every year with little effect on prices. Those who are looking to purchase physical gold in large quantities have not been able to buy what they need at the paper price.
It’s clear that there is a major discrepancy between the price of physical and paper gold.
Just ask the United States why its taking so long to return Germany’s gold back and you’ll get a thousand answers; insurance issues, melting process, etc.
It is clear to me that the amount of “above ground” gold supply is not what it seems and I am confident that the numbers are well overstated.
If these factors weren’t enough to give gold a jolt of life, how about the continued removal of the dollar in world trade?
The Attack on the Dollar
I have talked about this topic extensively in many of my past letters; how countries such as China and Iran have been slowly removing the use of the dollar in international trade.
Earlier this month, we were told that Gazprom Neft, a subsidiary of Gazprom, may convert settlements with buyers from US dollars to euros, according to its chief Alexander Dyukov.
“We discussed with our buyers the possibility of converting contracts to euros. Almost 95 percent of buyers reaffirmed their readiness to switch over to settlements in euros,” he said.
“Yes, the US dollar still remains a reserve currency number one in the world but the amounts of foreign states’ reserves in US dollars gradually shrink and, accordingly, the use of the US dollar in this case as an instrument of punishment will be simply conducive to a situation when, at some moment, the US dollar will lose its position of the reserve currency and businessmen will transfer to the euro, yuan, rouble or Swiss franc,” Dyukov pointed out.”
But it’s not only Eastern nations that are slowly beginning to trade outside of the dollar.
In March, Germany signed agreements with Chinese financial authorities that permit the sale of bonds denominated in yuan at the Frankfurt Stock Exchange. The deal also means Frankfurt will become the first offshore “clearing center” for exchanging euros for yuan, which are needed for buying these Chinese bonds.
Then, just this week, China announced it will allow the direct trade between its yuan national currency and the British pound.
“China’s Foreign Exchange Trade System (CFETS) said Wednesday the Asian nation would start direct trade between the renminbi and the British pound on Thursday.
Sterling and yuan would be directly swapped without using the US dollar as an intermediary, the trade platform noted.
“The move will promote the bilateral trade and investment between China and the United Kingdom and facilitate the use of renminbi and pound in the cross-border trade settlement,” CFETS commented.”
A nation’s currency is its Achilles heel; take away its value, and you take away its power.
Don’t be surprised if the dollar continues to lose its value in world trade. It may be hard to grasp the concept of a falling dollar now, but its not as far fetched as it appears.
This is the exact reason why we all need to be more cognizant of what’s happening in the Middle East and the battle over world energy control.
These events affect much more than just oil and gas prices. They are a full-on economic battle over currency, world power, and the future of our lives.
Bulgaria Bank Run
Last week, I talked about how the United States was using Bulgaria to attack Russia.
This week, we got word that Corporate Commercial Bank (Corpbank), Bulgaria’s fourth largest bank, was seized by Bulgaria’s central bank after a run on the bank.
According to Reuters:
“A run on Corporate Commercial Bank (Corpbank) prompted Bulgaria’s central bank to take control of the country’s fourth-largest lender on Friday and its governor appealed to depositors to stay calm.
The Bulgarian National Bank (BNB) said it would handle Corpbank’s operations for three months and removed its management and supervisory board after the run, which was sparked by media reports of shady deals involving the bank.
The BNB said it acted after Corpbank said on Friday morning it had stopped all payments and bank operations due to a liquidity drain. The central bank said Corpbank was not bankrupt and other lenders in the country were safe from the effects.
“As you know, there has been a lot of talk about the bank and one of its shareholders, which triggered bank runs,” central bank governor Ivan Iskrov said at a news conference. “It is very important to be very careful when we talk about banks. Let’s not tear down our house alone unnecessarily.”
“Let me make this very clear. Corporate Commercial Bank is not a bankrupt bank. We are acting swiftly to avoid a bankruptcy,” said Iskrov.
He declined to give further details of the bank’s problems and said supervisors would carry out a full audit of its books.
The central bank action did not stop dozens of people from queuing outside the main office of the bank in the capital Sofia on Friday, and credit default swaps on the country’s debt hit a six-month high on fears of contagion. Sofia’s blue-chip shares index closed at its lowest level since February.
The central bank blocked depositors from withdrawing cash after it took control.”
As far as corruption at the bank goes, investigations have been confirmed. However, there remains little news of what’s really going on aside from the fact the bank’s deputy governor was being investigated for “abuse of office.”
I am not sure what that means, but could this have anything to do with the blockage of Russia’s South Stream pipeline project by the West?
You be the judge.
Sell in May, Buy in June
I expect that the GDXJ, GDX and other small cap miners/exploration stocks on the TSX Venture and TSX will continue to move higher over the coming months.
That’s not because I believe gold prices will climb higher, nor because the charts are telling me they will. Heck, we already know the price of paper gold is manipulated beyond any rhyme or reason.
It’s because the same thing happens almost every year…
Every year, retail brokers (although there aren’t many left in Canada) sell off before the summer to pay their taxes, take profits for their summer vacations, and almost completely leave the market (both on the buy and sell side).
When summer is over, they want their commissions and every one gets back to work. Since they’ve mainly sold off prior to the summer, they have only one rational choice to make money: buy.
When they buy, stocks move higher.
It really is a simple process that has happened year after year, for many years.
The market has changed dramatically over the past decade, so take this simple – yet effective – strategy with a grain of salt.
Furthermore, the tensions in the Middle East continue to heat up and that should make every one a little bit nervous.
Note: There won’t be a letter next Sunday as I am away with my son and my family on our annual fishing trip. My wish is that you all get to take time off this summer to spend with your loved ones.
The Equedia Letter