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Gold and Silver 2020 Macrocast - Craig Hemke (07/01/2020)

Gold and Silver 2020 Macrocast - Craig Hemke (07/01/2020)
By Craig Hemke 5 months ago 33294 Views No comments

January 07, 2020

The year 2019 unfolded just about as we predicted in our annual look-ahead post entitled "2010+9". And that's nice. But it's all for naught if we fail to correctly forecast where we go from here. With that in mind, here's a first look at what to expect in 2020.

These annual forecasts are risky business. Get it wrong and you create a paper trail for trolls to poach for years to come. Get it right and you get a few backslaps while being told that anyone could have foreseen the predicted events so get over yourself. Which leads me to wonder why I started making these forecasts in the first place...but here we go again.

First, a recap...

As 2017 began, we were told that the election of Trump would crash gold prices due to a soaring dollar, a surging U.S. economy, and a bursting of the bond bubble. This narrative seemed ridiculous at the time, and we were right...it was. And we wrote about it on January 17, 2017: https://www.tfmetalsreport.com/blog/8103/questioning-generally-accepted-narrative

The following year, even more supposed experts were calling for triple-digit gold prices and a resumption of the bear market. They were proven wrong. At TFMR, we expected prices to be steady and rising instead, as three themes would support prices. This was posted on January 4, 2018: https://www.tfmetalsreport.com/blog/8755/three-themes-2018

And last year at this time, all of the eight-figure Wall Street economists were insisting that gold would crash as the Fed hiked rates as many as four times in 2019. These same clowns expected the yield on the U.S. 10-year note to rise to 5%! This was utterly ridiculous for reasons we've discussed here for the past decade. So instead, we figured that 2019 would play out a lot like 2010 and forecasted "the best annual gains since 2010" in this post dated January 14, 2019: https://www.tfmetalsreport.com/blog/9151/2010-9

OK, so what are all of the mainstream "experts" forecasting for 2020? It's as if they never learn! The consensus is again for stable-to-higher interest rates, a rising dollar, a growing U.S. economy, and flat-to-falling precious metal prices. As you might expect, I disagree.

Let's start with that interest rate forecast. Back in December, Chief Goon Powell attempted to convince everyone that The Fed's preemptive easing cycle had run its course and that interest rates would remain unchanged for the balance of 2020. He also claimed that the REPO crisis was under control and that his current debt monetization scheme of $60B/month in T-bill purchases was "definitely not QE". All of this is simple garbage and SPIN.

Instead, the year 2020 will see a continued slowing of the U.S. and global economies, and the new geo-political worries will only worsen the decline. The Fed will be forced to resume their fed funds rate cut policy, and as the U.S. must fund a minimum budget deficit of $1.2T, they will also begin monetizing longer-term treasury notes. In case you missed it, the FOMC openly admitted this in the minutes of their December meeting. See below: https://www.federalreserve.gov/monetarypolicy/file...

It's not just the REPO & Liquidity Crisis that will cause the rate cuts and expansion of QE, it's the faltering U.S. economy too. Led by the manufacturing sector, the U.S. economy is stumbling into contraction and recession, just as it did in 2010-2011. See this Reuters link: https://www.reuters.com/article/us-usa-economy-pmi...

From that summary, check this excerpt:

So, will these PMIs drop to near 40 in the months ahead? Check this Deutsche Bank chart from last October. Given how accurate this has been in the ninety days since, I'd say the chances are pretty high.

So the global economy is faltering and the central banks will soon be forced into more rate cuts and debt monetization. The only other piece of the puzzle is the forex market, specifically the U.S. dollar. While not a direct correlation to dollar gold prices, a rising or falling dollar can provide either a headwind or a tailwind. Check the chart below. With the dollar index breaking down, along with a bearish "death cross" of its key moving averages, does it appear that those dollar winds will be in our face or at our back in 2020?

So there's your macro forecast for 2020: a slowing economy and surging fiscal deficit leads to more QE, lower interest rates, negative real (inflation-adjusted) rates, and a falling dollar.

But let's get to the heart of the matter…the prospects in 2020 for gold, silver, and the mining shares.

At this critical time, no forecast of PM prices should begin without first noting the extreme, all-time high levels of contract open interest on the COMEX. In desperate protection of their established (and now deeply underwater) short positions, The Banks in 2019 increased the total supply of COMEX gold contracts by 329,806 contracts, or about 73%.

(As an example of the criminally fraudulent nature of this exchange, be sure to note that 329,806 contracts is the equivalent of 32,980,600 pretend gold ounces and that year-end total open interest was 786,166 contracts for 78,616,600 pretend ounces. For reference, total global mine supply for 2019 will likely be around 90,000,000 actual, physical ounces.)

Prices rallied regardless, but the change in Bank/Commercial positioning is significant. On the CFTC-issued Commitment of Traders report, the "Commercials" began 2019 with a NET short position of 92,700 gold contracts. As of the most recent report, these same "Commercials" now hold a new all-time high NET short position of 366,500 contracts. Specific to The Banks, the CFTC also issues a monthly Bank Participation Report. As 2019 began, The Banks reported a NET short position of 88,265 contracts. By early December, it was 205,224 contracts. So, again, any guesses as to the prospects for additional gains in COMEX gold prices must be tempered due to the extreme positioning of these market-dominating Banks.

However, this does NOT mean that prices can't go higher in 2020. Given the macroeconomic forces discussed earlier in this post, they almost certainly will. However, it's not going to be easy and The Banks will fight against every uptick. The old all-time high for COMEX gold open interest was seen in 2016 near 660,000 contracts. We're now near 800,000 and The Banks will not hesitate to take it to 900,000 or even 1,000,000 in 2020. This continued dilution will impact price, you can be certain of that.

Regardless, I expect higher gold prices in 2020. How high? The first key level to watch will be a weekly close above $1550. Last Friday, January 3, saw our first close above that level, but that was primarily due to the current geopolitical concerns. What will be needed is a sustained move above this key level. And why is $1550 so important? For nearly nineteen months, following the price peak in September of 2011, the area around $1550 held as important support. Now on the way back up, this area acts as significant resistance.

I think the breakout above $1550 comes in Q1 of this year, and once that's accomplished, the next target is near $1650. If we finished the year there, COMEX gold would register an annual gain of about 8.5%. While nothing to sneeze at, that seems a little light given all that we've laid out above. So an aggressive target for 2020 is actually $1800 or so. That would be a 25% gain on the year. Can we get there? Again, given the already-bloated OI and CoT positioning, it's not going to be easy, but it's certainly possible.

Turning to COMEX silver...it, too, has seen its open interest and Bank positioning increase greatly in 2019, but not nearly to the extreme as COMEX gold. Therefore, the fight for gains will be challenging but not insurmountable.

In our 2010+9 forecast last year, I thought COMEX silver could reach all the way to $20 and maybe even $22. As you know, it reached $19.75 in early September before sliding backward to finish the year at $17.90. For 2020, eclipsing $18.50 on a weekly closing basis will be the first step, followed by a trip to $20. Once above there, the clear and obvious target is $22.

Just getting to $22 would signify a 23% gain, and that would seem to be an appropriate expectation. However, IF things can really get rolling, then the all-important and critical resistance of $26 will come into view. Can we get there in 2020? We'll just have to see how bad the macro picture gets. In the meantime, even a move to $22 will be sufficient to spark the mining shares even higher.

And let's conclude with the mining shares, because if you want to make some old-fashioned fiat currency trading profits in 2020, this will be where the action is.

Why? As Grant Williams and Rick Rule have noted, total global asset allocation to the entire precious metal sector remains below 1%. The highest it has ever been was in 1980 when it reached 8%, while the long-term median is closer to 2.5%.

So let's just say that all of the macro factors listed above come to pass. Let's also assume that precious metals prices continue with just a gradual incline this year. Taken together, these two factors will have a significant impact on the viability and profitability of the mining companies, and large institutions—think hedge, mutual, and pension funds—will take notice.

With gold prices remaining above $1500, the Q4 2019 earnings reports for the major producers (due in late January and early February) will again show 3-5X growth over Q4 of 2018. As metal prices continue higher, the reports for Q1 2020 will be even better. This WILL get the attention of global money managers seeking "alpha" and precious metal exposure.

So what happens if that global asset allocation percentage moves back to the long-term median of 2.5%? Where will that cash go? Sector exposure will be sought, and demand for precious metal IN ALL ITS FORMS will grow. This means that a huge flow of funds will be looking for a home...but there are VERY limited opportunities! Thus a "crowding in" of investment dollars will very likely spark outsized gains for the mining shares in 2020. Just how outsized?

At present, the GDX is moving up toward significant resistance at $31-32. Once above there—and this flow of funds will make it happen—the target becomes $40 and then $50. A move from the current $29 to the expected $50 would be a gain of 72%. That certainly qualifies as "outsized".

However, if COMEX gold can stretch toward $1800 and/or if COMEX silver can stretch above $22, then the gains in the juniors and explorers will be even better. At present, the GDXJ ETF is trading near $42. Once above $55, first $70 and then even $100/share come into view.

In summary, you should expect a continuation of this renewed bull market in 2020 as the macroeconomic forces that drove demand for precious metal in 2019 extend and worsen. However and as always, these gains will not come easy, as The Banks will fight us every step of the way.

In dollar terms, precious metal prices will see another year of strong gains, so prepare and stack accordingly. However, if you can withstand the volatility and you want to have some fun, there will be sizable fiat profits to be booked from the mining shares, and this sector will likely receive some additional focus here at TFMR in 2020.

Thus now is the time to join us at TFMR. Not only do you receive daily analysis and podcasts, you'll gain access to the greatest and most knowledgeable community of investors on the internet—and all for just 40¢/day. You can learn more about a monthly or annual subscription here: www.tfmetalsreport.com/subscribe

Let's make it a great 2020!

About Sprott Money

Specializing in the sale of bullion, bullion storage and precious metals registered investments, there’s a reason Sprott Money is called “The Most Trusted Name in Precious Metals”.

Since 2008, our customers have trusted us to provide guidance, education, and superior customer service as we help build their holdings in precious metals—no matter the size of the portfolio. Chairman, Eric Sprott, and President, Larisa Sprott, are proud to head up one of the most well-known and reputable precious metal firms in North America. Learn more about Sprott Money.



Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities. Since 2010, he has been the editor and publisher of the TF Metals Report found at TFMetalsReport.com, an online community for precious metal investors.

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