Announcer: You're listening to the Weekly Wrap-Up on Sprott Money News.
Craig: Well, greeting once again from Sprott Money News, sprottmoney.com. It is Friday June the 29th, last Friday of the month, last Friday of the quarter, and we are here to wrap it all up. I'm your host Craig Hemke. And you may recall last week Eric Sprott was on vacation, Eric could not join us this week because he's still on vacation. So, we have joining us a special guest today. His name is David Brady. If you follow sprottmoney.com and if you stop by the site, you likely know by now David has joined our list of writers that contributes to the Sprott Money blogs on a weekly basis, always full of great information. He is the CEO and co-founder of a great site called globalprotraders.com. David, thank you for sitting in for Eric this week.
David: Well, thanks for having me on Craig, appreciate it.
Craig: Hey, David, before we get started, tell everybody a little bit about globalprotraders.com so that they know a little more about you.
David: Well, everyone knows me, I think, from Twitter, those that know me. Twitter is a great tool, it's a great way to share information, but it's somewhat limited. And I wanted to create a forum for professional and novice traders to be able to exchange their views and opinions on markets in a more holistic way, for want of a better term, not just in terms of content and being able to provide more information, be able to write an essay on a dollar, yuan if you want or post, not just four graphs, but 10 or 20 to support their thesis, and to do that and also enable them to be able to provide views, not just based on technicals but also fundamentals. I call it my five best process, which is fundamentals, inter market analysis positioning, Elliot Wave theory, Fibonacci levels, sentiment and technicals and manipulation. So it's a democratic forum, just to enable people, both professionals and relatively amateur investors, to share their views in a very supportive and collaborative environment.
Craig: It's a great site. I invite everybody to check it out. And, again, David has joined us, been invited to become a featured writer at sprottmoney.com. If you go to sprottmoney.com, the website, in the navigation bar at the top there's a tab for knowledge. You click on knowledge and a menu drops down, and there's a tab there for blogs. And there you'll find the work of David, he writes something usually every week, as do I, as do a number of other folks. So I encourage you to check it out. While you're at sprottmoney.com, also check out the exciting offer that we have for Canada Day, which is coming up next Sunday, July the 1st. So go there and check this out. You can save $1.20 per ounce over spot on the purchase of any 30th anniversary one-ounce silver maple leaf coin. Only Canada can you get this. What a great deal this is. Limited quantities are available, so take advantage of the special Canada Day promotion again by visiting sprottmoney.com or calling 888-861-0775. David, you've been writing some great stuff lately, and I want to explore a little bit this morning some of those same topics. First of all, gosh, gold and silver have just had a terrible period of 60 days, and it's really been wearing everybody out. You've noticed though that we're probably getting pretty close to the end by some traditional technical measures that measure them both as being pretty dramatically oversold. Can you expand on that?
David: Yeah, sure. As part of my five best process, I mean, we'll talk about fundamentals later and then we can talk into American analysis, which deals with the Dixie, but the raw data is technicals, sentiment, and positioning. Well, I just posted yesterday in my site and on Twitter. If you combine the sentiment for gold, silver, and platinum together, they're all at eight on the DSI. There's one day in December...sorry, one day in December 2016 where they were lower on a combined basis. It's 24, three times eight. Well, it hit 20 on December 15th, 2016. Anybody remembers that day or that period, it was when we bottomed at 1238 and rose to 1365. Then if you look back at...if you want to go further back, you go back to August 2015 to get a lower value on a combined basis. Well, what happened four months later, gold had its biggest rally in history, one of its biggest rallies in history. I'd also tie that in with, by the way, we'll talk about this later, devaluation of the yuan was in August 2015 also when they devalued 3% and the stock market in the U.S. had a wobble. Well, the dollar/yuan has been devalued by 6% in the past three months, and S&P hasn't made any ground to the upside to any great extent, but it hasn't fallen dramatically either, so there's good almonds there.
On the positioning side, and Craig can talk to this better than I can, if you look at the funds or the money managers as we say, in gold, they're at extremely low levels, lowest level since January 19, 2016. Again, that was the start of the massive rally in gold. The silver funds got a little excited a couple of weeks back, and they ramped up their lungs and got hammered by the bullion banks in the process, but they're still, by historical standards, relatively low. And given the drop in silver since then, I expect today at 3:30 we're going to see it dramatically lower, perhaps even short in gold, neutral in silver. And platinum, if anybody takes a look at platinum positioning, you will see the funds are record short, the banks, the swaps as they're called, they're record long. For me, the only two things to watch going forward, the primary things, not the only two, but the primary two are the positioning of the banks in gold and silver.
They're still short despite the decline in both prices last week. If they go to neutral or if they go long, better still, that's a really good sign that the gold, silver is at least a short-term bottom. And then, of course, look at the dollar/yuan because that's one of the principal drivers of the past week or two weeks. And we'll get into the trade or discussion shortly. Technically, you've got gold is close to key critical, I would call it, support at 1240. Actually, I think there's a scenario where they might break down below that because we got way oversold RSI in the technicals, but you could see a bounce and then it goes down to a lower low in price, but a positive divergence on the RSI, that will be another signal that gold's done on the downside and up it goes. Silver will just below 50, 16 or around 1590. It could go down to previous low 1563, but we're close to a lower there as well. And platinum 860, may be a 850s, that is at the bottom of its channel for the past few months, and that's to at least a short-term bounce. But, my point is and answered your question, Craig, if you look at the data, just data by itself, it is all very supportive of the fact that either we've seen the bottom or we're extremely close to. Personally, I think we're going to get a bounce, and we may get a lower low, but that's it.
Craig: So, David, you actually led me right to the other thing I wanted to discuss this morning. You wrote a great column earlier this week. And, again, anybody can find this on the sprottmoney.com website, hit knowledge and then hit blog, and you'll find this very insightful column that David wrote for us a couple of days ago. And you were detailing, in that article, the ongoing relationship between this COMEX digital price of gold but also the Dollar Index but more specifically the Chinese Yuan and how the three are interacting. Let me just leave it there and let you pick it up and run with it.
David: Yeah, I just make a comment to begin with after posting that, particularly on Twitter. I get responses that the Chinese renminbi or Chinese yuan has nothing to do with the price of gold. Gold's only priced in dollars...really? Gold is priced in every currency or as Mike Maloney likes to say, "Every currency is priced in gold." It's mathematically obvious that the Chinese yuan is a primary determinant of gold prices, and simply this, golden dollars is equal to golden yuan divided by dollar/yuan, its an equation. So if gold in yuan terms is stable between 8200 to 8300, which you can see in a graph,that means that it's been divided by dollar/yuan. That gold and dollar terms goes down if dollar/yuan goes up, it's as simple as that. And the issue right now is that there's a trade war going on between the U.S. and China, and, you know, U.S. imposed tariffs, China responds accordingly, but China has other tools and it's using them. The Yuan has been devalued by 6% in the past three months, not in one fell move, it has been steadily devalued by 6% over time. And meanwhile gold in yuan terms has remained relatively stable between 8200 to 8300, so the only currency that gold is falling in really is against the dollar. But I don't think this is going to last because the whole purpose of U.S. tariffs was to make Chinese goods more expensive in the U.S.
Well, if China is devaluing their currency,that makes Chinese products cheaper in the U.S., which defeats the whole purpose of U.S. tariffs. So either two things will happen, or there's a few things that could happen, but the U.S. can increase their tariffs or may broaden them, they can label China a currency manipulator, which is symbolic in nature, but will draw the ire of the Chinese to respond, or they could come to an agreement and have a beer together and say, "Hey, all's fair in love and war," and decide to move on and the Chinese yuan falls...sorry, rises against the dollar and the dollar/yuan falls and gold goes back up. The point being at the end of the day that I don't think this is sustainable, it defeats the whole purpose of U.S. tariffs and something's got to happen here shortly. Otherwise, the Chinese can respond to even more nuclear options if this thing escalates further. They can sell their massive amount of US treasuries, which Japan is already doing, they could revalue gold in yuan terms, which theoretically or using a textbook means that gold falls by the same amount...sorry, gold stays the same amount in dollar terms, but the dollar/yuan goes up dramatically, but that would put gold front and center on the world stage, and I think that would cause gold go up dramatically. And there are other tools they can use as well. So, cut the long story short, it's been extremely negative for gold in the past few weeks, but I think it's coming to a close shortly.
Craig: So you put that together with the technical positioning, and it would seem as if, just like last year, we may be on the verge of a summer rally. You pointed out as well, you go back to 2015, the last time that Chinese aggressively, somewhat aggressively or however you want to label it, began to devalue the yuan and it dropped about 3%. Well, that trickled over pretty quickly into the U.S. equity markets, and at one point, there was about a two-week period in August of that year where the S&P fell over 10% before recovering, and gold went on a care from there, of course, it ultimately bottomed a couple months later, but all of these things begin to point toward a summer rally, not summer doldrums, wouldn't you think?
David: Absolutely, and, Craig, that segues into the second point, besides the trade war, there's another key aspect to all of this. It's not just dollar/yuan that's taken up the torch, if you will, recently, it's also the dollar itself in general. And so the second factor driving gold South is dollar strength, in general, not just against the yuan but in general. And you see this in the DXYs rise since February 16 to 88 up to 95. There's been a lot of great work done recently, most particularly Luke Roman did an interview of macro voices, which I highly recommend people listen to. But it comes down to this, the Fed focuses on three things. It focuses on stocks for obvious reasons, stock are 150% of U.S. GDP. If stock prices fall, federal tax receipts fall, and the budget deficit is already ballooning due to higher interest costs, tax cuts, and higher spending. Well, if stocks fall then we start creating concern about the perception of U.S. insolvency. And we all know that Fed is extremely supportive of stocks, Its just that Powell's Fed put is a little lower.
The second factor is bonds. Well, they can't let bond yields, bond prices to fall because that would literally collapse everything, that's the foundation of all risk asset values. And the third factor is the dollar. So they notice back at the start of the year that as the QT progressed, dollar weakness was contributing to higher bond yields. So they decided to reverse course on the dollar and prop it up, and since then the dollar has been going up. But the problem for them is that the dollar is creating massive stress, as Jim Rickards pointed it recently, and we can see for ourselves in emerging markets. A lot of people think that this doesn't impact the U.S., of course, it does. It has in the past and it will it again, it's something called contagion. Has anyone noticed that U.S. bank stocks have fallen in price for 12 days 13 days in a row? And that's the worst run in history for the banks. Well, emerging markets, the reason why they're in trouble is they have massive amounts of dollar debt and the dollar strengthening. If any of those default on their debt, as Argentina was close to doing recently until it was bailed out by IMF, a lot of banks are going to get into trouble. And this is why it'll spread globally, it's not just U.S. banks, it's European banks etc.
And the other factor it contributes to is that the dollar strength lowers the dollar value of foreign earnings of U.S. multinationals, it lowers their earnings. So there's various ways that dollar strength undermines the stock market. Now switching to Lee Adler's comments recently about QT in particular and how it increases to 50 billion in October, and then it's on a run rate of 600 billion a year at a time when the treasury supply is increasing 100 billion a month and foreign buyers are disappearing, even with the risk of China selling, Japan is already selling US treasuries, there's obviously a gap to fill there, and there's only so much domestic buyers can do. So the risk is that stocks are going to come under pressure as the dollar strengthens, and it's going to be made worse by the fact that there's going to be a need for capital to go into the bond market to prop up bonds and keep yields down.
And Ron actually, another gentleman who pointed out correctly for quite some time that there's a risk with the Fed's QT program progressing and the ECB planning to taper their QE to zero in December, that global liquidity turns negative on a net basis in Q4Q1. Why does this matter? Well, I'm just speaking for myself, Craig, but the only reason to all those equity bulls out there, the primary reason for the stock market rallies since 2009 is central bank stimulus. You can look at a chart, it's not a spurious correlation, its obvious. If you take the punchbowl away, like any Ponzi scheme, if you not only...the funds don't have to fall, they just have to stay the same. So if there isn't an increasing amount of cash flows into the equity market, the equity market collapses like any Ponzi scheme. And Ron points out that global liquidity turns negative come Q1, early 2019, perhaps even Q4. So when you combine those factors, I've said repeatedly on Twitter since February 2nd, I think, that I expect a crash in the fall of this year. Now, why does that matter to gold, bringing it all back?
Well, going back to the three factors that the Fed looks at stocks, bonds, and the dollar, if stocks crash then that's fundamental to U.S. solvency, that's fundamental of Federal Reserve tax receipts...sorry, Federal tax receipts. They have to prop it up. So what are they going to do? They're going to have to reverse course, they're going to have to end QT and the rate hikes and reverse course to QE, well, and sacrifice the dollar in the process because they'll want to boost inflation, they'll want to boost corporate earnings, and inflation is the typical way that they do that. And they also need to inflate away their massive and growing pile of debt. So they're going to sacrifice the dollar in order to preserve the bond market and the stock market. And if the dollar does fall, which I expected will, what do you expect is going to happen to gold and silver? They're going to explode higher in value, maybe not instantaneously, but they're certainly going to go up from that point forward. So, cut the long story short, when the stock market crashes, gold and silver may go down, you know the bullion banks will probably climb on board, and shortly thereafter, when you see the dollar peak and fall, that's when gold and silver will take off. And the only other comment I would make, Craig, before we go is its July 4th next week, and you might see the bullion banks come in and take an opportunity to make a few more dimes off our backs because it's going to be in a liquid period, so just keep that in mind folks.
Craig: Yeah, no doubt about it. The new quarter begins but then we have this U.S. market holiday right in the middle of the week, Wednesday is July the 4th, and we will have the US markets closed. And for everybody wondering about that, yeah, it is Independence Day here at south of the border, as they say up in Toronto. Sprott Money, we talked about this last week, the offer continues, you can buy a one-ounce silver American Eagle for just $2.99 over spot. What a great way to celebrate Independence Day. Buy some silver eagles. This is not just Canadian listeners that can take advantage, this is for U.S. as well, as it should be for crying out loud. Take advantage of the special promotion by calling 888-861-0775 or, of course, visiting sprottmoney.com to find out more. And, again, sprottmoney.com is where you can find the weekly writings of David Brady, others such as myself. We encourage you to check it out, all kinds of great resources there, all of the audio file from Ask The Expert, past Weekly Wrap-Ups, it's all right there at sprottmoney.com, so check it out. And, again, look for weekly input from David Brady, he obviously knows what he's talking about. I think it's really an honor to have him join the team. David, thank you so much for your time this morning.
David: And thanks so much for having me on, Craig, and please pass on my gratitude to Eric as well for not being here.
Craig. Exactly. He's out having fun for all of us in Ireland, as he should for crying out loud. Anyway, thank you again, David, and thank you everybody for listening. Have a great weekend, and we'll talk to you again next week.