Is the Gold Price a Harbinger of Market Doom?

by David EngstromAugust 04, 2015

“Another Crisis Is Coming.”  These are the words of JPMorgan CEO, Jamie Dimon, in his 2014 letter to shareholders.  He does not say when another crisis is coming or what will bring it about.  His actions, however, indicate he is wasting no time in preparing.

In June it was reported that JPMorgan had taken delivery of 8.67 million ounces of physical COMEX silver during the month of May.  That amount would reportedly bring JPMorgan’s physical stockpile to more than 55 million ounces.  This is an amount equal to 6% of all the silver mined in a year. 

Then all seemed quiet.  The mainstream media ignored the news.  You would think when the CEO of the largest investment bank in the country warns that another crisis is coming, he should be on every channel in the country talking about why he believes such is the case.  Maybe Jamie Dimon was asked and maybe he declined.  Nonetheless, little was said.  Even less was said when it came to light about JPMorgan’s effort to build such a huge stockpile of silver.

This month (July) JPMorgan is at it again.  As of this writing, JPMorgan has taken delivery of another 9.79 million ounces of physical silver in both its House and Customer accounts.  This, at a time when the U.S. Mint made its second announcement in 9 months that it was sold out of Silver American Eagles.  In July, the U.S. Mint was on pace to sell more Eagles in one month than it did in any year between 2000 and 2007.  It cannot go without mentioning that Gold Eagle sales by the mint are also on record pace.

These are all facts [you can verify them yourself by clicking on the links below} yet the mainstream sees fit not to report them.  Instead, expert after expert is paraded past our screens telling us what a bad investment both gold and silver are. 

Funny how when stocks are down it’s a good buying opportunity.  When gold and silver prices are down, it’s time to run for the hills and sell.  Maybe this explains the conspicuous silence of JPMorgan on its recent actions.  Surely, if what JPMorgan was doing was widely reported, the silver price would likely rise thus killing an opportunity to continue to stockpile more at lower prices in the weeks or months ahead.

Is This What JPMorgan Sees Coming?

Many an expert has been publicly discredited when dates are put to predictions – especially when it comes to timing any market.  There are just too many ways to overtly manipulate the money supply, interest rates and the ease at which credit flows through the economy.  One can, however, spot trends and predict the inevitable.  It really doesn’t take a genius.  Numbers don’t lie and history cannot be erased. 

Herein lies the focus of what I am about to reveal.  A combination of facts, timelines and historical response to specific conditions can be most enlightening.  Let’s begin with the premise that our national debt has reached explosive levels.  More than one expert has referred to it as a tinderbox waiting for a spark to ignite another crisis. 

Remember the “can”?  You know the one the media talked about for two years?  For two years we were warned that printing money would increase debt and bring us to a time of crisis greater than the one we went through in 2008.  In 2008, the interest payments on our national debt, combined with our fixed obligation to pay out on our unfunded liabilities, (entitlements) equaled 66% of our total federal revenue.  By 2012, that percentage exploded to 88% and both the Fed and the markets panicked. 

In response the Fed implemented the “Twist” and began another round of Quantitative Easing.  The Twist was really a fancy way of saying they were refinancing debt and QE was nothing more than an attempt to pump the economy so full of liquidity,  GDP could not help but grow.  That was the strategy.  Grow tax revenues by growing the GDP and lower debt payments by lowering interest rates.  It worked for awhile.  Indeed the can was once again kicked down the road.

In December of 2014, I set out to find the can.  The media had forgotten about it – never talked about it anymore.  But, it had to be out there somewhere, clunking down the road to its inevitable end.  I did find the can.  It was about 71% of its way to the end of the road.  Interest payments, as previously described, equaled 71% of total federal revenues. 

Yes, its progress had been slowed from 2012 levels, but not nearly to the rate the Fed hoped.  In fact, the Fed has failed miserably to accomplish what it set out to do.  It pumped an amount of money into the economy equal to 6% of total GDP.  $85 billion a month was printed to buy Treasuries and Mortgage Backed Securities. 

One problem.  Do you recall any month where we had 6% GDP growth?  Instead we have barely seen 2% growth since this grand experiment began.  Now, despite any Fed effort, the can is accelerating down the road.  In just these few months, since December 2014, the can has now moved 75% of the way to the end.

In December of 2014, when total interest paid equaled 71% of total federal revenue, that meant interest rates needed only to rise 41% to reach an amount equal to 100% of total federal tax revenues. 

71% x 1.41 = 100%

At the time it was estimated our total debt was financed at 1.64% using a combination of various term bills, notes and bonds.  Using this number, a 41% rise would translate to 67 basis points.  Today, as the can has now moved 75% of the way to the end of the road, all things being equal, rates need only rise 34% or a total of 56 basis points to equal total federal revenue.

75% x 1.34 = 100%

It is difficult to know the maturity dates of all the bonds sold to finance our debt.  What we do know is that at the current pace at which the can clunks down the road, it has moved 4% further to the end in just 7 months.  Considering rates go neither up nor down from here, we can now see the can reaching the end of the road in less than 42 months. 

In 2012, as our interest to revenue level reached 88%, extraordinary measures were taken to bring that level down.  If 88% is our true interest payment threshold and rates go neither up nor down from here, we are then just 24 months away from needing more extraordinary measures to avoid disaster.

The key here is “if rates go neither up nor down.”  With the Fed saying the data currently support a rate hike in September, what does that do to our federal cost of borrowing?  If rates need only rise 56 basis points today, to reach a 100% interest to revenue level, then even the proposed 25 basis point increase, closes the gap quickly between being able to meet our payment obligations and chaos.    

In July of 2012, the 10 year bond was trading at 1.47%.  Today the ten-year note trades at 2.21%, 64 basis points higher than it was at our 88% interest to revenue levels.  Whether the Fed raises rates or not, rates are rising.  Again, it is hard to know the maturity dates of all the bonds sold to finance our debt.  Clearly, however, 24 months could turn into something much less as interest rates rise. 

Then there is the acceleration factor.  All things cannot be equal when debt continues to rise.  Once again the federal budget deficit is growing not shrinking.  And the can is moving down the road faster and faster each day.  Then consider some 10,000 people per day are reaching retirement age.  The strain on debt grows as these people stop paying into the system and start taking out.  And the 24 month timeline shortens even more.

The likes of Ron Paul and other noted insiders say we are just a few months away from total collapse.  A look at the numbers and we can now see why.  Alan Greenspan has also joined this chorus with a multitude of compatriot insiders who view things in like manner.  But, there is another voice barely heard over the uproar.  It’s the Voice of Gold.

Can gold price movements help us pinpoint the date of the next crisis?  Since the dawn of the millennium, the markets have been struck by two crises.  In both instances, as history now reveals, the gold price was the harbinger of market chaos.

The 2001 Harbinger

In May the DOW, reached its 2001 peak as it made a run at a record high.  That record high came at the height of the Dot-Com era.  The effort fell short.  Instead of new highs, the DOW, in dramatic fashion, lost 27% over the next 4 months.  The Dot-Com bubble was confirmed to have burst.  Further losses would ensue and the Dow did not return to those Dot-Com era highs until March of 2006. 

Just 3 months prior to the beginning of the end for the Dot-Coms, gold hit an 18 month low of $256 an ounce.  I recall one well-known TV analyst, who is still on the air, specifically saying, “Gold is at $256 an ounce . . . I wouldn’t touch it.”  

IMPORTANT NOTE:  When gold hit $256 an ounce, it traded 17% below its total cost of production as then measured. 

That was the beginning of an historic ten-year run that saw gold rise 571% from the 18 month low in February of 2001.  And what did stocks do in that same 10 year period?  The answer may stun you.  From February 16 2001, the day gold bottomed at $256 an ounce, to February 16, 2011, the Dow managed a 13.6% gain.  Barely 1% per year on a compounded basis.

Funny how some things never change.  In 2001, gold was said to be among the worst investments you could make.  Sound familiar?  Would history repeat?

The 2008 Harbinger

In September of 2008, it was becoming clear the recent record high for stocks, set in October of 2007, would not be revisited any time soon.  On September 15, Lehman filed bankruptcy.  On September 19, the DOW began a precipitous collapse.  By March 9, 2009, less than 6 months after the Lehman event, the DOW lost 39% of its value. 

Six months prior to the Lehman event, Gold reached record nominal highs.  On March 18, 2008, gold traded at $1005 an ounce.  By September 11, 2008, gold fell to a 12 month low of $745 an ounce.

Important Note: By October 2008, just after the Lehman event, Gold traded 15.2% lower than its considered total cost of production.

During the ensuing six month decline of stocks, gold started to shine.  By the time stocks completed their 39% decline in March 2009, gold rose 33% from the October bottom.  But the best was yet to come. By fall of 2011, gold reached $1921. 

Once again, in gold’s seemingly darkest hour, monster gains were there to be had by those who understood gold was real money.  You can’t print it.

The 2015 Harbinger

Some speak of 7-year cycles of chaos and have predicted another crisis is about to befall us beginning this year.  Is the gold price now telling us the same story told in 2001 and 2008?  Can we use history lessons learned to see what’s next for gold and the markets?  Let’s see.

 

2001 Timeline

February, 2001 – Gold trades at 18 month low

February, 2001 - Gold bottoms 17% below total cost of production

May, 2001 – Markets turn

September, 2001 – Dow down 27%

October, 2001 – Gold up 14% from 18 month low

 

2008 Timeline

September, 2008 – Gold trades at 12 month low

September, 2008 – Lehman Event – Markets turn

October, 2008 – Gold bottoms 15.2% below all-in cost of production   

March, 2009 – Dow down 39%

March, 2009 – Gold up 33% from October, 2008 bottom

 

2015 Timeline

May 2015 – Dow hits record high

July, 2015 – Gold trades 10.1% lower than all-in cost of production  

July, 2015 – Dow Trades 3.3% off Record Highs

Future – Dow– Let’s look

Future – Gold – Let’s look

 

2015 Harbinger Indicators

  1. If the gold price is giving us the same indicator now as it did in 2001, the Dow may see one more run toward a record high by mid-August before making its final bear market turn.
  2. If the May, 2015 record high marks the turning point in the markets, the Dow could fall 27% to 13,367 by mid-September.  If the turn comes mid-August, the 27% fall will be seen sometime mid-December.
  3. In 2008, six months after the Lehman event confirmed a bear market, the Dow lost 39% of its value.  If our 2015 Lehman event is confirmed to have taken place in May, then the Dow could fall 39% to 11,179 by November.   
  4. In 2001, gold bottomed in February, trading at 17% below its total cost of production.  In July, 2015 gold traded at 10.1% below its all-in cost of production.  If gold follows the 2001 indicator, it could bottom at $996 an ounce.
  5. In 2008, gold bottomed 15.2% lower than its all-in cost of production.  That would put the 2015 gold bottom at $1017 an ounce. 

This is as close as I will come to making any predictions.  History is not necessarily an indicator of future performance – at least to the point where you can make a 100% accurate prediction.  Here, I only attempt to combine the inevitable with the possible to give some guidance.

We know a debt crisis is coming.  We’ve known it all along.  So, how do we prepare?  - - and When?  At present, numerous insiders have warned of a market collapse by the end of this year.  Some cite religious events.  Some say a giant tsunami will trigger global financial collapse.  Some refer to the seven year cycles of chaos.  All say another crisis is inevitable.  Many are preparing now. 

Has the gold price become its own harbinger of chaos to come?  You decide.  Then prepare accordingly. 

Warning:  If you are contemplating an addition of gold or silver to your portfolio, consider that both gold and silver prices are currently so low as compared to their costs of production, a reversal in price could occur anytime.  There are already signs that major banks and central banks are waiting no longer to accumulate physical gold and silver reserves.  Who would know better where gold and silver prices will bottom.  The bottom could be in NOW! 

Resources   

http://www.usmint.gov/about_the_mint/index.cfm?action=PreciousMetals&type=bullion

http://www.cmegroup.com/delivery_reports/MetalsIssuesAndStopsYTDReport.pdf

http://www.coindesk.com/microscope-true-costs-gold-production/

http://seekingalpha.com/article/1472081-gold-prices-finally-hit-marginal-cost-of-production

http://www.mineweb.com/news/gold/many-gold-miners-in-dire-straits-despite-costs-cuts/

 

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