Wednesday, January 31, 2018

Jim Rickards: The Gold Markets Are Utterly Beaten... Now is the Time to Buy


Look, gold just finished a four-year plus bear market. It lasted from August 2011 to December 2015. In that bear market, gold went down about 45% peak to trough, and if you use the about $240 price from 1999 and just scale that up to $1,900 and then back down again to $1,050, which is where it was in December 2015, that was a 50% retracement. And by the way, my friend Jim Rogers, one of the greatest commodities traders in history, co-founder of the Quantum Fund with George Soros, a legendary commodities trader, he said to me and he has a lot of gold. He expects gold to go much higher, as do I, but he said, Jim, “Nothing goes from here to there.” Meaning, he’s reaching way up to the sky up into outer space. He says, “Nothing goes from here to there without a 50% retracement along the way.”

And I think that was very good advice. Well, okay, but we’ve had the 50% retracement. That’s behind us. We’re in a new bull market now. There was a bull market from August 1971 to January 1980 and gold went up over 2,000%. From January 1980 to August 1999, there was a very long, 20-year grind it down bear market, and gold went down about 70%. Then you had a new bull market that lasted from August 1999 to August 2011 and in that 12-year bull market, gold went up over 700%. Then you had another bear market from August 2011 to December 2015 and as I said, gold went down 45%. We’re in a new bull market. It started in December 2015.

Now, here are the facts, gold goes up and down. Lead’s volatile and we know there’s manipulation. People get discouraged and they buy gold and then some hedge fund or China comes along in the gold futures market and slams the price down. “Oh, gee, why did I buy it?” I get all that. I understand the discouragement. I understand how difficult it is to watch stocks go up and Bitcoin go up and I’m sitting here with gold and it just seems to be going sideways, but it’s not true. In 2016, gold went up over 8%. In 2017, gold went up over 13%. So far in 2018, gold is up 3%. You take the entire period from the bottom of the last bear market to the beginning of the bull market, December 2015 to today, gold is up over 25%. It’s been one of the best performing asset classes of all the major asset classes. It’s not crazy like Bitcoin, but Bitcoin’s collapsing, which I also predicted some time ago.

So, the truth of the matter is 2016-2017 are the first back-to-back years of gold gaining since 2011-2012, although at that point, it was already off the top. It’s more a statistical anomaly that gold went up in the year 2011. Yeah, it did, but it was way down, way off the peak in September of that year. But now we have two back-to-back years of gold going up very significantly. We’re in year three, 2018, is year three of this bull market. It’s off to a very nice start. The fundamentals are good. Their technicals are good. The supply and demand situation is good. We haven’t even gotten into other potential catalysts, including War with North Korea, loss of confidence in the dollar, financial panic. Even a normal business cycle recession or if inflation gets out of control, there’s just a whole list of things that are going to drive gold higher.

And the last point I want to make, Mike, is that gold is doing this performance against headwinds. The Fed has been raising rates. When you raise nominal rates and you tighten real rates, that’s normally a very difficult environment for gold and yet, gold’s going up anyway. Can you imagine what’s going to happen when the Fed has to back off… because right now, as I said, they’re over-tightening. When this economy slows, and that data starts rolling in later in the first quarter and early second quarter of 2018, the Fed’s going to do what they call “pause.” It doesn’t mean they’re going cut rates. That’s somewhere down the road, but they pause, which means that they…

Right now, they’re like clockwork. They’re going to raise every March, June, September, December – 25 basis points each time, boom, boom, boom, boom like clockwork. But, every now and then they don’t. They skip. They pause. Well, if your expectation is they’re going to raise and then they don’t, they pause, that’s a form of ease. It’s ease relative to expectations. That’s what’s going to happen later this year. All of a sudden, this headwind’s going to turn into a tailwind and gold’s going to get an even bigger boost. I see it going to $1,400 over the course of this year, perhaps higher. My long-term forecast for gold, of course, is $10,000 an ounce, but that’s… and I’m not backing away from that. That’s just simple math. That’s the implied noninflationary price of gold if you need to use gold to restore confidence in a monetary system in a financial panic or liquidity crisis where people have lost confidence. That’s not some made up number. That number is actually fairly easy to calculate, but you don’t go there overnight. You got to get to $2,000 and $5,000 before you get to $10,000.

I think right now, we’re in a new bull market. It’s going to run for years. We’ve got that momentum. We’re off the bottom, but people are always most discouraged at the bottom, right? Well, that’s the time you should buy. It’s just human nature. I’m not faulting anyone. I’m not criticizing anyone, it’s just human nature to say, “Oh man, I’m so beaten down. I’m so sick of this. I’m so tired of this.” Well, that’s usually the time to buy and guess what, it is.


- Source, Jim Rickards via Value Walk

Sunday, January 28, 2018

The Next Financial Panic Will Be The Biggest Of All, With Only One Place To Turn…


What would the forecast be for the year ahead? What do I think about stocks and so forth? That’s one part of the analysis, but the other one is a little bigger and a little deeper, which is what about another major financial crisis, a liquidity crisis, global financial panic and what would the response function be to that.

Let me separate. They’re related because, I mean the point I always make is that there’s a difference between a business cycle recession and a financial panic. They’re two different things. They can go together, but they don’t have to. For example, October 29, 1987, the Stock Market fell 22% in one day. In today’s Dow terms that would be the equivalent of 5,000 Dow points, so we’re at 26,000 or whatever, as we speak, a 22% drop would take it down about 5,000 points. You and I both know that if the Dow Jones fell 500 points that would be all anybody would hear about or talk about. Well, imagine 5,000 points. Well, that actually happened in percentage terms in October 1987. So, that’s a financial panic, but there was no recession. The economy was fine and we pulled out of that in a couple of days. Actually, after the panic, it wasn’t such a bad time to buy and stocks rallied back. Then, for example in 1990, you had a normal business cycle recession. Unemployment went up. There were some defaults and all that, but there was no financial panic.

In 2008, you had both. You had a recession that began in 2007 and lasted until 2009 and you had a financial panic that reached a peak in September-October 2008 with Lehman and AIG, so they’re separate things. They can run together. Let’s separate them and talk about the business cycle. I’m not as optimistic on the economy right now. I know there’s a lot of hoopla. We just had the big Trump Tax Bill and the Stock Market’s reaching all-time highs. I mean, I read the tape. I get all that, but there are a lot headwinds in this economy. There’s good evidence that the Fed is over-tightening.

Remember the Fed is doing two things at once that they’ve never done before. They’re raising rates. I mean, they’ve done that many times, but they’re raising rates, but at the same time, they’re reducing their balance sheet. This is the opposite of QE. I’m sure a lot of listeners are familiar with QE, Quantitative Easing, which is money printing. That’s all it is. And they do it by buying bonds. Then when they pay for the bonds from the dealers, they do it with money that comes out of thin air. That’s how they expand the money supply. Well, they did that starting in 2008 all the way through until 2013, and then they tapered it off and the taper was over by the end of 2014, but they were still buying bonds. So, that was six years of bond buying. They expanded their balance sheet from $800 billion to $4.4 trillion.

Well, now they’re putting that in reverse. They grabbed the gear and they shifted it into reverse and they’re actually not dumping bonds. They’re not going to sell a single bond, but what happens is, when bonds mature, the Treasury just sends you the money, so if you bought a five-year bond five years ago and it matures today, the Treasury just sends you the money. Well, when you send money to the Fed, the money disappears. It’s the opposite of money printing. So, the Feds are actually destroying money, actually reducing the money supply, so they’re raising rates and destroying money at the same time. It’s a double whammy of tightening and I don’t believe the U.S. economy’s nearly as strong as the Fed believes. They rely on what’s called the “Phillips Curve,” which says unemployment’s low, that’s a constraint and wages are going to go up and inflation is right around the corner. And that’s part of the reason they’re tightening, but there are a lot of flaws in that theory.

First of all, the basic Phillips Curve theory is junk. It’s just not true. We saw that in the late ’70s when we had sky high unemployment and sky-high inflation at the same time. We’ve also seen it recently when we’ve had low unemployment and disinflation at the same time. So, you start by saying the Phillips Curve is junk, but even if you thought there was something to it, there’s so many problems with it in terms of labor force participation demographics, debt deleveraging, technology, et cetera, that it just doesn’t apply under the current circumstances.

So, the Feds are tightening for the wrong reason. They are tightening at the wrong time and there’s a lot of evidence that a lot of the growth in the fourth quarter was consumption driven, but that was debt driven. People charged up their credit cards, consumer debt spiked. The savings rate is near a very long-term low. It doesn’t look sustainable, so lots of reasons to think that the Fed’s going to overdo it, get it wrong, tighten, throw the economy either into a recession or very low growth with disinflation, so I’m just not buying the inflation “happy days are here again” story.

There’s also good reason to believe that the Tax Bill will not be as stimulative as people expect. All that’s truly going on is the running up the deficit by another trillion dollars and we’re already way into the danger zone and then that’s actually a drag on growth. So, there’s a good reason to think the economy is going to slow, that by itself would take the wind out of the Stock Market and close it at the potentially very serious Stock Market correction, at least 10%, maybe as much as 20%. We’re talking about going down as I say 5,000 or 6,000 points on the Dow before the end of the year, so that’s one scenario.

The scenario I talk about in my book really involves a financial panic. Now, the thing there is that these are not that rare. I already mentioned the one, really two-day panic in 1987, but in 1994 you had the Mexico Tequila Crisis. In 1997, you had the Asian Peninsula Crisis. In 1998, you had the Russia Long-Term Capital Management Crisis. In 2000, you had the dot.com meltdown. In 2007, the mortgage meltdown. In 2008, the financial panic. These things happen every five, six, seven years, not like clockwork, but that’s a typical tempo for these kinds of meltdowns and it’s been nine years since the last one. So, nobody should be surprised if it happens tomorrow. I’m not predicting it will happen tomorrow. I’m just saying nobody should be surprised if it does, whether it’s tomorrow, or next month or next year, or even a year and a half from now, don’t think for one minute that we’re living in a world free of financial panics.

By the way, these two things could happen together. You could have a slowdown that leads to a financial crisis, a replay of 2008. But here’s the difference and this is really the point of your question, Mike. In 1998, we had a financial panic and Wall Street got together and bailed out the Hedge Fund Long Term Capital Management. In 2008, we had a financial panic and the Central Banks got together and bailed out Wall Street, so each bailout gets bigger than the one before it. In the next panic, whether it’s this year or next year, who’s going to bail out the Central Banks. In other words, each panic’s bigger than the one before. Each response is bigger than the one before going down this chronological sequence.

The next one is going to be the biggest of all. It’s going to be bigger than the Central Banks and you’re only going to have one place to turn. If you had to get global liquidity right now, the Fed’s at that one and half percent in terms of the target Fed funds rate, so they most they could cut is one and a half percent to get back to zero. There’s good evidence that to get the U.S. economy out of a recession, you have to cut interest rates three or four percent. Well, how can you cut them three percent when you’re only at one and a quarter, one and a half percent. Well, the answer is you can’t, so then what’d you do? Well, then you go to QE, but they already did that.

They haven’t unwound the QE. They started to and that’s what I mentioned, but they haven’t unwound it. The balance sheet is still around four trillion dollars, so what’d going to go to eight trillion, twelve trillion? I mean, some people would say, “Yeah, what’s the problem.” Those are the modern, monetary theorists, Stephanie Calvin, Paul McCulley, Warren Mosler. There’re a bunch of them that think that there’s no limit in the amount of money the Fed can print, but there is a limit. It’s not a legal limit. Legally the Fed could do it, but there’s a psychological limit. There’s an invisible competence boundary that you cross when people just say “You know what, I’m out of here. Get me out of dollars. Get me into gold, silver, fine art, land. Whatever. Crypto-currencies, if you like. Whatever it might be but get me into something other than dollars because I’ve lost confidence in the dollar.” And we’ve seen that before also.

So, putting that all together, in the next financial panic and nobody should be surprised if it happens tomorrow, it’s going to be bigger than the Central Banks. They’re going to have to turn to the IMF for liquidity. The IMF has a printing press also, that’s the International Monetary Fund. They can print this world money called the Special Drawing Right of the SDR, so yeah, they can pull trillions of SDRs worth trillions of dollars. One SDR is worth about $1.50. They could pull trillions of SDRs out of thin air and pass them around, but here’s the point and I spoke to Tim Geithner about this, former Secretary of the Treasury. It takes time.

The last time they did this and by the way, it went completely unnoticed, the panic was in ’08 and in August and September of 2009, the IMF did issue SDRs to help with global liquidity, but that was almost a year after the panic. The point is, the IMF is slow and clunky. It’s not the fire department. I mean, they might be like a construction crew that can come in and put in a new foundation, but they’re not the fire department that can help you when the building’s burning down.

So, what they’re going to have to do is what I call Ice 9. They’re going to have to freeze the system. First, starting with money market funds, then bank accounts, then stock exchanges, they might reprogram the ATMs to let you have $300 a day for gas and groceries. They’ll say, “well, why do you need more than $300 a day to get some food and gas in your car? Why do you need more than that? We can’t let you take all your money out of the bank. We can’t let you take your money out of the money market funds. We can let you sell your stocks.” And I describe all this in the book in detail with a lot of endnotes. You don’t have to read the endnotes unless you want to, but this is all documented. It’s all publicly available. It’s not some science fiction scenario. This plan is actually in place and I describe how.

Just to wrap up, I expect a weaker economy than the mainstream in 2018. Perhaps, a stock market crashing based on that alone. I also expect another financial panic. It’s impossible to say when, but eight years on, nine years on, I would say sooner than later. And this response function is going to be something that people haven’t seen since the 1930s.

- Source, Jim Rickards via Value Walk

Friday, January 26, 2018

James Rickards: Is $10000 Gold What Investors Really Want?


A rapidly increasing price level for gold may not be beneficial to investors, said best-selling author, Jim Rickards. $10,000 an ounce is “approximately the implied non-deflationary price of gold in a gold-backed monetary system,” Rickards told Kitco News on the sidelines of the Vancouver Resource Investment Conference.

Rickards noted, however, that gold at $10,000 levels may imply an increase of prices of other goods and commodities, thus eroding purchasing power. “All gold does is it preserves your purchasing power. 

But, if gold is $5,000, then oil is probably $400, and everything is double or triple, you’re not really ahead of the game,” Rickards said. 

The best-selling author added that 2018 may be a breakout year soon, and that a pending economic downturn is imminent and would be triggered by a liquidity crisis worse than the Great Financial Crisis in 2008.


- Source, Kitco News


Thursday, January 25, 2018

Has Jim Rickards Changed His Mind on Bitcoin?


My readers know I’m not a bitcoin proponent. I don’t deny that it’s made some people a lot of money, but I believe bitcoin is a massive bubble right now.

Yet it’s been reported in some circles that I’ve recently come out in favor of bitcoin.

It’s not true.

Now, it is true that I’ve stated my belief in blockchain technology, which is the technology behind bitcoin and other cryptocurrencies. There’s great promise here. And despite what some critics may claim, I’m not some technophobe who doesn’t understand the technology underlying cryptos.

I know it very well. I’ve been studying cryptos since before many of their current owners even heard of bitcoin. I actually worked with the intelligence community to counter ISIS’s use of cryptocurrencies to bypass the international money system.

And in my opinion, the hype has run far ahead of reality. This is reflected in bitcoin’s meteoric and unsustainable rise. But again, I also believe blockchain technology is for real and has great potential. So just because I’m not a bitcoin cheerleader doesn’t mean I’m opposed to all blockchain-based cryptos.

(In a few weeks, I’ll actually be conducting a debate with leading cryptocurrency expert James Altucher. The topic will be gold versus bitcoin, and I can’t wait to give viewers the whole story. Stay tuned for details.)

Today, I want to talk a little more about how gold and blockchain technology could lead the world away from the dollar-based system…

Despite everything you may hear in the mainstream media, gold is as relevant as ever.

Russia and China, for example, have been accumulating thousands of tons of physical gold bullion for the last 10 years. That’s not news, of course.

What is news is that both countries are starting to make moves toward the end game of a gold-backed currency that completely bypasses the U.S. dollar payments system.

These moves are both geopolitical and monetary.

In fact, they track the gold-based attack on the U.S. dollar that I devised for the Pentagon in their first-ever financial war game in 2009. That financial war game is described in detail in my 2011 book, Currency Wars.

It looks like the Russians and Chinese read my book!

According to Russian government officials attending a recent monetary conference in Moscow, Russia, China and their BRICS allies are moving toward their own gold trading system (bypassing London and New York).

From there it’s a small step toward a new gold-backed digital currency using distributed ledger technology and military-grade encryption. Distributed ledger technology is another term for the blockchain technology I discussed above.

But unlike cryptocurrencies like bitcoin, this digital system is backed by gold.

Once that system is up and running, the BRICS can trade and settle oil, commodities, weapons, manufactured goods and the overall balance of payments without using dollars or Western financial intermediaries at all.

And from there, a global loss of confidence in the dollar is not far behind. Do you think bitcoin will win the most in this scenario?

It won’t. The big winner in all of this will be gold.

Below, my colleague and senior geologist Byron King shows you how Russia is stockpiling gold as a “fire escape” currency to bypass the U.S.-backed monetary system. Read on to see how this development will dramatically affect the price of gold in the years to come.

- Source, Jim Rickards

Wednesday, January 17, 2018

James Rickards Warns: 2018 Will Be The Year Of Living Dangerously


I’m calling 2018 “The Year of Living Dangerously.”

That description might seem odd to lot of observers. Major U.S. stock indexes keep hitting new all-time highs. 2017 went down as the first calendar year in which the Dow Jones industrial average was up for all 12 months.

Even in strong bull market years there are usually one or two down months as stocks take a breather on the way higher. Not last year. There’s been no rest for the bull; it’s up, up and away.

Inflation is tame, even too tame for the Fed’s liking. The unemployment rate is at a 17-year low. U.S. growth was over 3% in the second and third quarters of 2017, much closer to long-term trend growth than the tepid 2% growth we’ve seen since the end of the last recession in June 2009.

The U.S. is not alone. For the first time since 2007, we’re seeing strong synchronized growth in the U.S., Europe, China, Japan (the “big four”) as well as other developed and emerging markets.

Growth breeds growth as consumers in one country create demand for goods and services provided by another. This is what economists mean by “self-sustaining” growth instead of force-fed growth from easy money and government spending.

Technology rules the day. The pace of innovation is unprecedented in world history. Our daily needs are being fulfilled better, faster and cheaper by the likes of Amazon, Google, Netflix and Apple. We can share the good news on Facebook.

Best of all, the U.S. Congress and White House got around to cutting our taxes in late December!

In short, all’s right with the world.

Or not.

To understand why 2018 may unfold catastrophically, we can begin with a simple metaphor. Imagine a magnificent mansion built with the finest materials and craftsmanship and furnished with the most expensive couches and carpets and decorated with fine art.

Now imagine this mansion is built on quicksand. It will have a brief shining moment and then sink slowly before finally collapsing under its own weight.

That’s a metaphor. How about hard analysis? Here it is:

Start with debt. Much of the good news described above was achieved not with real productivity but with mountains of debt including central bank liabilities.

In a recent article, Yale scholar Stephen Roach points out that between 2008 and 2017 the combined balance sheets of the central banks of the U.S., Japan and the eurozone expanded by $8.3 trillion, while nominal GDP in those same economies expanded $2.1 trillion.

What happens when you print $8.3 trillion in money and only get $2.1 trillion of growth? What happened to the extra $6.2 trillion of printed money?

The answer is that it went into assets. Stocks, bonds, emerging-market debt and real estate have all been pumped up by central bank money printing.

What makes 2018 different from the prior 10 years? The answer is that this is the year the central banks stop printing and take away the punch bowl.

The Fed is already destroying money (they do this by not rolling over maturing bonds). By the end of 2018, the annual pace of money destruction will be $600 billion.

The European Central Bank and Bank of Japan are not yet at the point of reducing money supply, but they have stopped expanding it and plan to reduce money supply later this year.

In economics, everything happens at the margin. When something is expanding and then stops expanding, the marginal impact is the same as shrinking.

Apart from money supply, all of the major central banks are planning rate hikes, and some, such as those in the U.S. and U.K., are actually implementing them.

Reducing money supply and raising interest rates might be the right policy if price inflation were out of control. But prices are actually falling.

The “inflation” is not in consumer prices; it’s in asset prices. The impact of money supply reduction and higher rates will be falling asset prices in stocks, bonds and real estate — the asset bubble in reverse.

The problem with asset prices is that they do not move in a smooth, linear way. Asset prices are prone to bubbles on the upside and panics on the downside. Small moves can cascade out of control (the technical name for this is “hypersynchronous”) and lead to a global liquidity crisis worse than 2008.

This will not be a soft landing. The central banks — especially the U.S. Fed, first under Ben Bernanke and later under Janet Yellen — repeated Alan Greenspan’s blunder from 2005–06.

Greenspan left rates too low for too long and got a monstrous bubble in residential real estate that led the financial world to the brink of total collapse in 2008.

Bernanke and Yellen also left rates too low for too long. They should have started rate and balance sheet normalization in 2010 at the early stages of the current expansion when the economy could have borne it (albeit without Dow 25,000). They didn’t.

Bernanke and Yellen did not get a residential real estate bubble. Instead, they got an “everything bubble.” In the fullness of time, this will be viewed as the greatest blunder in the history of central banking.

Not only that, but Greenspan left Bernanke some dry powder in 2007 because the Fed’s balance sheet was only $800 billion. The Fed had policy space to respond to the panic of 2008 with rate cuts and QE1.

Today the Fed’s balance sheet is $4 trillion. If a panic started tomorrow, the Fed’s capacity to cut rates is only 1.25% and its capacity to expand the balance sheet is nil, because the Fed would be pushing the outer limits of an invisible confidence boundary.

This conundrum of how central banks unwind easy money without causing a recession (or worse) is just one small part of a risky mosaic. I’ll be writing about the other pieces of the puzzle in future commentaries.

Here’s a sneak preview:

  • Student loan debt is over $1.4 trillion, and default rates are over 20%. Most of these defaults have not yet hit the federal budget deficit. They will soon. Resulting bad credit ratings are standing in the way of jobs and household formation for an entire generation of millennials.
  • The new U.S. tax bill is the greatest hoax since Orson Welles’ 1938 radio broadcast, “War of the Worlds,” about an invasion of Earth by Mars. Orson Welles caused a panic in the New Jersey/New York listening area, with people fleeing their homes and jamming the roads. The tax bill damage will be less visible but far more damaging.

Biggest winners: corporations and billionaires. Biggest loser: the U.S. economy. I’ll have a lot more to say about this in the weeks ahead. What is certain is the tax bill will add $2 trillion or more to the deficit, something the U.S. can ill afford.

  • A catastrophic wave of emerging-market defaults is coming, with enormous spillover effects likely in developed economies. This will be worse than the Latin American defaults of the 1980s and the Asian-Russia defaults of the late 1990s. It will emerge from Turkey and Venezuela but won’t stop there.
  • A war is coming between the U.S. and North Korea, probably by this summer. The best case is that the U.S. wins but at a very high cost in lives and money. The worst case is World War III when China, Russia and Japan are drawn in due to the inevitable unforeseen consequences of war.
There’s more to come over the weeks ahead. For now, think of 2018 as the year of living dangerously.

- Source, Jim Rickards via Zero Hedge

Sunday, January 14, 2018

Jim Rickards and Peter Schiff Discuss Global Gold Markets


Jim Rickards is Chief Global Strategist at the West Shore Funds, and Director of The James Rickards Project, an inquiry into the complex dynamics of geopolitics and global capital. 

In The Death of Money, Rickards shows why another monetary system collapse is rapidly approaching – and why this time, nothing less than the institution of money itself is at risk. 

Fortunately, it's not too late to prepare for the coming death of money. Rickards explains the power of converting unreliable money into real wealth, such as gold and other long term stores of value.

- Source, Peter Schiff

Thursday, January 11, 2018

James Rickards: Powell Will Do Exactly What Yellen Would Do


James Rickards is the bestselling author of Currency Wars, The Death of Money, The New Case for Gold, and The Road to Ruin. 

Interview Highlights 

[0:55] Update on N. Korea -- A war is not priced into the market. Is it a real possibility? 
[8:05] How important is the language coming out of the White House? 
[12:05] Is Jerome Powell a surprise choice for Fed Chairman? [20:30] Will Powell be 'innovative' with policy? 
[24:00] Are bond yields providing a good signal to investors?


Monday, January 8, 2018

James Rickards: Oil Prices Could Soon Drop 50%

Oil has had a spectacular run the past two years. From $29.42 per barrel on January 15, 2016, oil has risen to $57.36 per barrel as of last Friday, a 95% gain in less than 23 months.

Much of this gain reflects the determination of the world’s two largest oil exporters – Saudi Arabia and Russia – to limit output in order to firm up prices. The duopoly of Saudi Arabia and Russia has proved much more effective than OPEC at maintaining the discipline needed to control oil prices.

OPEC members such as Iran and Iraq are notorious for cheating on OPEC quotas. The duopoly is more disciplined.

Yet, this kind of manipulation is a two-edged sword. Saudi Arabia and Russia have as much interest in not letting prices get too high as they do in not letting them get too low.

Right now oil prices are at the high end of the range the duopoly consider acceptable. Oil prices have nowhere to go but down once Saudi Arabia and Russia do some cheating of their own.

Investors who move now stand to reap huge gains as the duopoly drive prices lower in order to protect their market share, and once again shut-in the capacity of their competitors in the fracking industry.


This infographic neatly illustrates the market dominance of two oil producers: Saudi Arabia and Russia. Together they produce 21 million barrels of oil per day, over 25% of global output. The two countries can effectively set the global price of oil by increasing or decreasing output in tandem. The duopoly have proved more effective than OPEC at price targeting to hurt the fracking industry while not reducing their own revenues more than necessary.

Despite the ebbs and flows of oil supply and demand, and technical aspects of trading, the overriding dynamic in global energy markets is straightforward. In any market, there are price takers and price makers. The only price makers in global energy markets are Saudi Arabia and Russia, if they act together.

Saudi Arabia and Russia, (the “duopoly”) together produce 25% of the world’s oil exports. That’s more than the next six major oil exporters combined, and those others have nowhere near the degree of coordination as the duopoly.

Equally important is that Saudi Arabia has the lowest production costs of any major producer, about $4.00 per barrel. It’s certainly the case that Saudi Arabia likes higher oil prices, but oil could sink to $10 per barrel, and Saudi Arabia would still make money while most other exporters would lose money or cease production.

The duopoly face a familiar dilemma that could confront any business. On the one hand they like high prices and the revenue that goes with it.

On the other hand, high prices have two perils…

The first is that high prices encourage competition in the form of marginal output that can take market share. The second is that high prices can produce a recession in developed economies that reduces oil consumption across the board.

Obviously the duopoly would like higher prices, but this just encourages output from marginal producers especially those using hydraulic fracturing technology (“fracking”) in places like the Permian Basin in Texas.

The solution to this dilemma is an optimization plan using linear programming. The way to model this is to ask: “What is an optimal price that destroys competition andmaximizes revenue at the same time?”

Saudi Arabia ran this program in mid-2014. They concluded that the optimal price is $60 per barrel.

Of course, just because the computer says $60 does not mean you can stick the landing in the real world. There are many factors that go into oil pricing including geopolitics, central bank induced inflation or disinflation, and technical trading patterns.

In particular, once a price moves radically in a macro market there is a tendency to “overshoot;” something that is quite common in currency markets for example.

That said, Saudi Arabia set out in mid-2014 to crush the price of oil in order to destroy the fracking industry, which had emerged as a major competitive threat in 2011. The impact of the Saudi plan, and both the old and new trading ranges for oil are illustrated in the chart below:


This chart shows NYMEX light sweet crude oil (WTI) prices from 2011 to 2017. The pre-2014 trading range was $80 to $115 per barrel. The post-2014 trading range is $25 to $60 per barrel. Saudi Arabia engineered the lower trading range in order to shut-in fracking capacity. Russia and Saudi Arabia work together today to keep an oil price ceiling of $60 per barrel. With oil near the high end of that range, signs of slowing growth in China, and disinflation in the U.S., a decline in oil prices is highly likely.

While the Saudi plan was effective, the fracking industry did not simply disappear. In fact, the initial response of the frackers was to pump more oil. This additional output plus overshooting accounts for the dip in oil prices to the $30 per barrel level in early 2016.

The reason frackers produced more oil at lower prices was because of their financial constraints. The frackers had loaded up on leases, equipment and labor during the good times of $100 per barrel oil prior to 2014.

This was done with high leverage, which burdened the frackers with fixed interest and principal payments. Frackers did this in the belief that oil prices would stay above $70 per barrel. Some fracker cost structures ran as high as $130 per barrel to achieve profitability.

Many of those costs were fixed, at least in the short run. Pumping oil at a loss was better than not pumping at all because it generated some cash flow to pay interest while the frackers waited for better times.

The better times never came. Oil prices did bounce off the early 2016 lows and have stabilized closer to $45.00 per barrel, but that’s still not high enough to support most of the frackers.

As the bankruptcies and debt restructurings piled up, a new wave of frackers entered the game. This new wave purchased assets from failing frackers at cents-on-the-dollar and continued exploration and drilling with improved cost structures.

Some of the “new wave” frackers were actually from the original wave in 2011, but had managed to hold on either because they had piles of cash from their first financings, or because they had cut costs sufficiently to stay in the game for a while.

Saudi Arabia perceived the threat from the new wave of frackers and decided to go for the kill.

To do this, they enlisted Russia and created the duopoly. Now the stage is set for a new round of oil price declines and another bloodbath in the fracking fields.

What are my predictive analytic models telling us about the prospects for oil prices in 2018?

Right now the action nodes are telling us that energy prices are heading for a fall.

The recent bilateral production agreement between Saudi Arabia and Russia combined with the multilateral production agreement in OPEC is designed to cap output and stabilize prices around the $60 level.

These new agreements basically reaffirm production limits that had been agreed earlier this year. Those agreements account for the run-up in the oil price since mid-2017.

Yet, the frackers have not gone away. Some are hanging by their fingernails with negative cash flow in the hope of higher prices. The duopoly are set to disappoint them.

Now that the duopoly and OPEC production quotas are set, the cheating can begin.

Perennial cheaters such as Iran and Iraq will be the first to overproduce. Venezuela’s economy is in free fall, and it will certainly take the opportunity to overproduce also. Once supply increases, the duopoly will tag along with their own increases in order not to lose market share.

The frackers talk a good game when it comes to profitability, but they can’t walk the walk. As the saying goes, “Fish gotta’ swim, birds gotta’ fly, and Texas wildcatters gotta’ pump oil.”

With the $60 per barrel cap firmly in place, and oil prices near that level, the price has nowhere to go but down. Prices near the top of the trading range will induce additional output.

This time the frackers won’t get a reprieve because their bankers, stockholders, and bondholders won’t allow it.

Losing money is not a sustainable business model.

- Source, James Rickards via the Daily Reckoning

Friday, January 5, 2018

Jim Rickards Reasons that the Next Great Gold Bull Market Has Begun

The most important piece of evidence that the next great bull market in gold has begun is the technical behavior of the prior bear market itself.

Over many decades, commodities rallies have exhibited 50% retracements (bear markets) before resuming their long-term upward trends based on the slow, steady devaluation of the fiat currency in which the commodities are priced.

Using the $252 price from August 1999 as a baseline and referencing the September 2011 peak price of $1,900 per ounce, gold gained $1,648 per ounce in the bull market. A 50% retracement of that 12-year rally means a decline of $824 per ounce (i.e., 50% of the $1,648-per-ounce gain), which would put gold at $1,076 per ounce.

Guess where gold bottomed?

It bottomed at $1,051 per ounce, within 2% of the 50% retracement target. That decline is an almost perfect technical retracement.

By itself, this pattern proves nothing without additional confirmatory evidence. This is why we did not call the end of the bear market in 2015. We needed more proof.

There were (and still are) plenty of analysts calling for $800-per-ounce gold. How do we know that recent gains are not just another bear trap?

The reason rests in the consistency of the gains. Gold rose 8.5% in 2016, a solid if not spectacular gain. Then gold rose again in 2017, by over 12%.

Gold fell on an annual basis in 2013, 2014 and 2015. Gold has not had back-to-back annual gains since 2011–12. These back-to-back gains in 2016–17 point to a solid foundation and a decisive break in the prior years’ bear market trend.

This “steady Eddie” performance the past two years has been overshadowed by much more spectacular gains in stocks and bitcoin.

Recent gains in stocks may continue for a while but are ultimately unsustainable because of the likelihood of a recession or liquidity crisis in the next few years. In those conditions, a retreat in stock prices of 30–50% would not be at all unusual.

Bitcoin is an unprecedented combination of fraud, mania and a Ponzi scheme all in one. The bitcoin price could go higher in the short run but will also end in tears, with 90% losses for na├»ve “investors” from around the world lured into an artificially pumped-up mania.

Meanwhile, gold is in the early stages of a sustainable long-term bull market that will come to surpass the 1999–2011 bull market in time.

Investor psychology has been slow to change despite recent gains. Gold investors have been discouraged by the periodic drawdowns in the gold price, including the November–December 2016 mini-crash after Trump’s election.

But these short-term drawdowns need to be considered in the context of the much more positive long-term trend just described.

The historic 1999–2011 rally also started slowly and then gained steam. The largest percentage gains year over year did not begin until 2005, almost six years after the bull market began. From there the bull market still had almost six years to run.


In addition to the retracement pattern and back-to-back annual gains that validate the start of a new bull market in gold, another technical pattern (with fundamental roots) has emerged as a positive for gold.

I’m sure you’ve heard the old adage that things happen in threes. This can apply to good things and bad. Right now we’re witnessing a positive phenomenon in threes when it comes to gold and Fed monetary policy.

On Dec. 16, 2015, the Fed raised interest rates for the first time in nine years. This was the famous “liftoff” and happened after the Fed teased markets about a rate hike through all of 2015.

Immediately after the rate hike, gold surged from $1,062 per ounce to $1,366 per ounce by July 8, 2016, a spectacular 29% rally and gold’s best six-month performance in decades.

Then on Dec. 14, 2016, the Fed again raised rates for the first time since the December 2015 rate hike despite earlier expectations that the Fed would hike rates four times in 2016. Gold surged again from $1,128 per ounce at the time of the rate hike to $1,346 per ounce on Sept. 8, 2017, a 19% rally in just over nine months.

Last month, for the third December in a row, the Fed hiked rates again after taking a “pause” on rate hikes in September. Once again, gold answered the starting gun. Gold immediately rallied from $1,240 per ounce on the afternoon of Dec. 13 to $1,258 per ounce the next day, a solid 1.5% gain in one day.

If gold follows the pattern of the last two December rate hikes, this new rally could go to $1,475 or higher by next summer. That would be a 20% rally in six months, roughly comparable to the rallies after the December 2015 and December 2016 rate hikes.


- Source, James Rickards via the Daily Reckoning