The economic data is starting to get dire and indicates the consumer part of the economy is taking a nosedive. We will get into details in the Macro View section of the report. Gold and silver, as a result, are holding up quite nicely. While gold and silver are fading this week, having some perspective on where we have come so far this year is helpful. Prices are still up on the year but have regressed since May. We will discuss what this likely means for the rest of the year on precious metals prices.
Gold and Silver Analysis
As you can see on the chart below, gold is fading today and sitting just under $1900. The price has been crashing down the last couple of days towards the lower end of the yearly trend, as I have highlighted in blue. This will alarm many investors, especially those who have been reading my columns claiming that the 3rd and 4th quarters are traditionally strong.
They are in the markets where it counts (more on that in a minute). However, the American market is fading the price and challenging the downside trend line, indicating an oncoming selloff. I believe this is mostly caused by fatigue in markets, where traders are becoming more cash poor as we head toward recession.
To be fair, at the same time I have lauded the precious metals (including silver) holding up relatively well over the summer, I also mentioned the fact that when recession neared, the metals would sell off in the Western derivative markets. And it is those markets that determine the spot prices in the US while taking signals from overseas liquidity (unallocated, not purely physical) in the UK market. In short, traders are fatigued and need to reset trades due to ongoing economic issues.
This is likely an economic selloff where traders need to ‘circle the wagons’, stockpile cash, and look for liquidity in their portfolios. The market knows we are headed for a deep recession, and is selling financial assets including gold and silver derivatives. In addition, the retail market in gold and silver paper assets, such as GLD and SLV ETFs, is not particularly strong though the dynamics are different for each.
The “boring” silver chart above more clearly depicts the recessionary trend. Silver is used mostly as an industrial metal, outside a small minority of retail stackers and well-off long-term investors that don’t play heavily into the COMEX price market that largely determines the spot in the US. The futures traders know we are heading into a recession because they read the same data I do and put it into this weekly report.
It was not unpredictable that the metals would slump, but what surprises me is that it is ongoing this late in the year. Simply put, the physical runoff in both metals off the COMEX industrial market since 2001 has not affected pricing in futures, which have oscillated around a fairly broad range, but not broken emphatically in one direction or the other.
In other words, the physical supply/demand dynamics are offset by the expectations of speculative traders that play futures and options on the COMEX. That is the standard, until we have a reason for traders to take note of physical metal scarcity. They typically do that when big news happens, such as bank failures, which propelled both gold and silver to a May high.
Traders obviously do not feel as though looming supply shortages in silver matter; nor that residual banking risk in the system will rear its ugly head. But I get to differ, as we point out regarding Bank of America’s major issue in the Story of the Week section of the report.
The Macro View
The economy is about universally getting worse across all broad metrics, and last week’s economic data is no exception. Here are the lowlights:
- Home builder confidence index sinks to a 45 print from last month’s 50
- Housing starts plummeted to 1.28 million from last month’s 1.45 million
- Building permits increased to 1.54 million from 1.44; though this represents a smaller portion of the home sales market (new home sales versus existing home sales)
- Philadelphia fed manufacturing survey crashes to -13.5 from last month’s positive 12
- US leading economic indicators index continues its pessimistic trend, down -0.4% for a second straight month
- Purchasing managers gave manufacturing a slight boost (up 1 point) versus a decline in services by 0.3 points; neither being particularly impactful
Summarizing the above, there are two minor bright spots in building permits and manufacturing purchasing manager expectations for growth, reflecting smaller parts of the economy when compared with the existing home sales market and services sector, respectively. But we will take whatever small positive news we can get, realizing the economy is likely about to enter a free fall phase later this year as debt problems begin to weigh on the economy.
Economic indicators relied on by economists are consistently declining month over month now without stopping. Manufacturing is plummeting still, and the slight rise in expectations is likely due to costs of inflation and not actual growth in production. In fact, CPI numbers practically guarantee it.
The macro market outlook in the US is getting bleak, and I would liken it to dark clouds forming on the horizon before a classic Texas thunderstorm. It is a warning sign that the heavy lightning, hail, and deluge of rain are just around the corner. The only question is, how long does this storm last? Is it a brief summer variety, or a more protracted fall variety shedding vast amounts of precipitation mercilessly across the horizon?
Story of the Week
Truth be told, I had tons of stories to tell you this week. For instance, I was going to give an update on the UAW strikes affecting the automobile market, the collapse of the large multi-billion dollar retail shopping project in the Meadowlands, or the city of Chicago’s probable disastrous decision to tax all financial transactions that would likely push the region’s financial sector all the way into another state.
But those are all trumped by breaking news that Bank of America (BofA) is literally melting down in bad debt. And I mean BADLY. In an article printed today (September 26th, 2003) on Wall Street on Parade, a stunning discovery was made on unrealized losses on HTM (held to maturity) debt for the second largest federally insured bank in the US, by assets, sitting at $2.4 trillion).
BofA has $105.79 billion in unrealized losses from HTM, accounting for about 1/3 of the entire banking sector’s unrealized losses in just one bank! These numbers are shocking, even for someone as jaded as me who has been following this stuff fervently for about 15 years now since researching for my book, Drop Shadow. Here is the story in summary form.
HTM securities, according to the article, are made up of federal agency mortgage-backed securities and U.S. Treasury bills, notes, and bonds. In other words, the same issue that plagued banks earlier this year, losses on treasury debt due to rising interest rates, along with the housing collapse I have been preaching about for about 6 months now, risks taking out the second-largest bank in the country. You thought SVB and the First Republic were bad? Those were drops in the bucket compared to a potential collapse of BofA.
Was this predictable? Well if you read my column and watched my videos, then yes I believe it was. I have said that while the Fed raising interest rates was absolutely necessary to stave off steep levels of inflation, I also mentioned it could adversely affect bank held assets. In other words, well-meant policies always have side effects. And this one is going to be a DOOZY.
What is even more shocking is that the largest bank by assets, JP Morgan, has $200 billion less in HTM assets than BofA. The authors of the story correctly ask the question of why BofA is holding so many mortgage and treasury debt.
We don’t have the answer, but you can bet your bottom dollar that if (no, when) the US government gets involved in addressing the meltdown, there will be an investigation as to why and how this all happened. Perhaps the most important part of the analysis explains why HTM debt risk is hidden away from public view, and why we are just now finding out about it. The article states the following.
“What that means is that the financial statement carrying value of those financial instruments held-to-maturity is reflected at amortized cost, or what management paid for the asset sometime in the past plus amortization of the discount or premium from the face value. The fair value is only disclosed on the face of the financial statement and in the footnotes. Any unrealized loss is ‘hidden in plain sight.’
However, management intent and business model do not change the value of financial instruments. The HTM classification only makes it harder for investors and depositors to see.”
Wow, just wow. You must love modern-day accounting! What comes next? Well, you already know what I am going to say. The debt meltdown is both a symptom and a cause of the coming recession. And that will eventually mean higher precious metals prices, regardless of what else is going on right now in the futures markets on COMEX.
All you must do is look at May highs this year to see how the banking crisis affects the metals prices. Or you can look at the pandemic in 2020 or the Great Recession in 2008-09.
Executive Summary
Gold and silver prices are fading due to trading fatigue and weakness in the futures markets. While prices are falling, they have held up well in a relatively boring summer without a bunch of bad banking news. We did have strikes and declining economic data, but the former really only showed up in the last couple of weeks. Something tells me gold traders knew trouble was brewing in the debt markets, much like we have been documenting.
So expect this current price swoon to likely be the last before the fireworks start. When will that be? It is anyone’s guess, but I know it is coming sooner rather than later. The economy is collapsing according to the data. And it typically starts slow and steady until a breaking point is reached, and then it comes fast and hard. Storm clouds are gathering, but the true deluge is yet to come. This time, you may want to buy a raft and some paddles.
Coin of the Week
As I write this, JM Bullion is running GREAT sales on silver. One such sale is the SilverTowne Buffalo round for $25.56. That is a really good deal and I encourage you, if you are a silver buyer, to take a gander at that one.
Mints are offering sales on in-house silver and gold because retail sentiment is a bit weak. But we know what is coming, and sales such as these are very unlikely to last to the end of the year. In my opinion, which you know all too well by now, the buying window on cheap gold and silver is ending. And I mean it won’t come back this time likely for a few years. See the 2009 to 2011 pricing charts for a good reference.
