Posted on May 10, 2023
The more we progress into the end of the dollar era, the more I am surprised at the reaction of the public to it. The truth is a funny thing; most will not accept it until it is simply beyond reproach. A quote from philosopher Arthur Schopenhauer explains the phenomenon.
“All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.”
Nowhere is that saying truer than it is when discussing the fate of the world’s most recognized currency. The whole world is watching this one, and it appears as though the writing is now on the wall (and on your TV set now as well). People are not ready to talk about it. I do not suppose I am going to receive a lot of new invites to parties any time soon either, which is quite all right.
But first, it is time to discuss what is going on with gold and silver.
The easiest way to describe the current gold market is to say that gold is in ‘vogue,’ but nobody wants to admit it publicly. While central bankers know the story and have been buying gold for over a decade in record amounts, the average financial pundit has their entire lives tied up in the current system. That is why despite obvious signs of financial distress, the financial industry has not jumped in with both feet to the precious metals yet. Soon; however, the truth will be evident and they will have no choice.
When you see gold and silver on your screens as part of your everyday news, you know we have reached the final stage described by Schopenhauer of acceptance of the truth. Right now, we are in the second stage where the truth is violently opposed by the financial establishment. Let us check the charts and see what we find.
I combined the chart this time because, despite price changes, not much has really changed since last week’s analysis. Simply, gold and silver are holding above critical resistance as we mentioned they likely would. The bank situation in the US has not resolved itself despite the best efforts by our government. Most people I talk to, from business owners to regular consumers, are still worried about the stability of the banking system. Therefore, there is a healthy amount of demand for gold holding the prices up.
Silver sits behind gold and does what it tells it to. At least, this is what happens during a bull run. Prior to the bank failures, silver was trading primarily as an industrial commodity. Any weakness in price was the result of derivative futures traders betting on where silver would trade next. But they were not thinking about SVB or whether the central banks wanted gold, making silver more attractive as money again.
But that is where we are now, and the derivative traders have woken up to the fact that both gold and silver are not just commodities. From watching the mainstream media; however, I do not see any central bankers or financial pundits extolling the virtues of the precious metals. That is how we know we are stage 2 and not the final stage of Schopenhauer’s forecast.
What we do know is that gold has remained above its 50- and 200-day moving averages, and looks like it wants to run even more. That is a sign of heavily increased worldwide physical demand starting to influence the derivative markets. I have always said demand in metals won’t move the price substantially until the traders figure out that we are in a shortage condition. The spot price will be the last thing to reflect a sudden increase in demand for silver or for gold.
I pointed out on the chart where heavy gold selling volume in futures occurred since the bank failures. This represents the vested interests in the commodities markets not wanting to lose their positions post the news coming out about the economy. If you think about it, traders place their positions on the commodities market months ahead of time to hedge price movements.
Either they are producing the metal, using it, or their clients have exposure through some other market or business. So physical panics at a point in time disrupt this pricing scheme and force traders to change their positioning. But they will not do it until they can close out their existing positions that are counter to the prevailing winds of the market. I believe this is why we see a delay in the inevitable rises and the actual prices rising from traders adjusting their positions.
In short, I expect continued bank failures, or the threat of them, to keep gold and silver at around the current levels. It would not surprise me to see a selloff before we rise to new gold highs again, only because traders are adjusting their positions for what looks like a rabid amount of demand slowly boiling up through the gold and silver markets. Think of it like the frog in a boiling water scenario; traders are the frog and don’t realize how hot it is getting until it is too obvious to be ignored any longer.
Unemployment numbers came into the headlines again over the last week as we got the ADP and BLS unemployment numbers. As per usual, the government had very rosy data on jobs. And as usual, they made downward revisions later without making a big hubbub about it. Why bother the public and tell them your numbers are consistently wrong and too high based upon a flawed methodology when you can simply change it later and not tell anyone?
The following chart shows the recent BLS revisions to employment numbers. Are we getting the real truth when the pie-in-the-sky numbers are first reported, or when they are adjusted later on to a more accurate picture of reality?
It is easy to complain about government numbers, so let us look at the CPI as an example. The government printed a 4.9% inflation print. You may notice that inflation has been coming down for several months. This may present the picture that the dollar crisis has been averted and inflation is under control. However, the economy is deflating and prices are simply reflecting collapsed demand by consumers.
Consumer spend on credit has exploded in recent years, and consumer savings has also decreased. Most of what is classified as consumer savings is in money market funds or their 401k. However, the average American does not have enough money to fully fund a 401k. And most do not have $400 in cash either. Most American wealth is tied up in homes while the real estate market has started to cool way off. The picture is stark for many Americans leading up to the next recession.
The biggest story of the week comes not from the United States, but from our esteemed neighbors to the south, Mexico. I love visiting Mexico for its beaches and margaritas as many American tourists do. But I have had the fortunate opportunity to see less well-traveled parts of the country while vising various mines, and this has been an incredibly enriching experience for me.
Recently, Mexican authorities have franticly passed 18 pieces of legislation in a new bill related to the mining industry designed to speed up development and reduce ‘parking’ existing mining claims without developing them. The bills were passed with no debate as they were held in an adjoining chamber under private vote, as opposed to the President’s party refused to vote on the legislation in the normal chamber.
Therefore, no opposition vote was allowed to be taken. I cannot imagine this going over well in America, and I am sure Mexicans who are in the know are not too happy as well. This will affect their mining industry which is a significant part of their overall GDP. While not as big a portion of Mexico’s GDP as manufacturing, I would point out that it is hard to make stuff if you do not have good quality and inexpensive raw materials. I expect supply costs simply to rise as a result of this legislation. Here is a quote from AP News on the changes.
“The new mining law reduces the maximum length of concessions from 50 to 30 years and punishes speculation by allowing authorities to cancel concessions if no work is done on them within two years.
The Senate also approved a bill mandating 10-to-15-year prison sentences for people who produce the synthetic opioid fentanyl in Mexico or who provide precursor chemicals largely imported from China. It makes drug production a separate crime, in addition to possession.
Perhaps more controversially, the senators approved a bill to replace the country’s science and technology commission — which hands out research grants and other funding — to include representatives from the Army and Navy on its board.”
Looking at the legislation, it appears the country wanted to punish supposed bad actors in the space, get the industry moving, reduce the effects of drug production, and involve the military in matters of science. That all seems reasonable, but the burdens placed on gold and silver miners are going to be extraordinary. What do I mean by that?
Having an audit background like I do introduces you to the costs of regulation. Whenever any political body passes a law, the net cost of that law is borne by those regulated by it. Companies must hire expensive personnel and sometimes also costly equipment. Those decisions affect the entire industry from top to bottom, and that is exactly what is going to happen here.
What is even more interesting is the militarization not only of the mining sector but of other industries. This is what tells me the legislation was not only about punishing bad actors as much as it was about securing the military authority of the present regime. Per the AP News story:
“Under another bill, the military would gain a dominant role in providing security in the country’s airspace, and would also be allowed to operate a commercial airline. That represents a potential conflict, since the army will also be allowed to operate civilian airports, and Mexican law prohibits an airport operator from also running an airline.
López Obrador has greatly expanded the military’s role to everything from building projects to operating companies.”
That quote indicates to me that the new regime will marry the military into industry and politics, and makes it MUCH more likely that the government will confiscate or heavily regulate industries to control the economy. I suspect Mexican authorities are preparing for the same thing authorities in the US are – the worldwide recession we have been speaking of for quite some time and that appears to be unfolding in 2023.
In that scenario, it makes sense that the government would want to control commerce. They will want to control the flow of goods and make sure their domestic needs are being served first. If the government believes the crisis warrants it, it could even stop exports of critical commodities and supplies.
And where does a lot of gold and silver in North America come from? As you can likely guess, it is Mexico. A lot of our food production comes from there as well, in case you were wondering. What happens next in Mexico is going to be interesting and may point towards the direction our North American trade markets are going.
Will we see more protectionism and less international trade? Will this affect existing economic ties between our neighbors to the north and south? Only time will tell. I cannot imagine any government wanting to do it right now, but tough times sometimes may call for tougher measures in the eyes of politicians facing a suffering population.
In addition, Mexico has a strong connection to China and friends through their trading network, the Belt and Road Initiative. This means that they have alternative sources of supply and demand from around the world. It is possible Mexico does not need us as much anymore as we need them, with the possible exception of their need for our Navy to protect their trade routes. Story to be continued …
The US economy has some obvious troubles in banking, employment, and with dollar liquidity. On the one hand, we lack liquidity in our economy due to the looming debt and higher interest rates. On the other, the rest of the world is dumping their dollars and sending them back to us. When the flow from overseas overtakes the domestic need, we will likely see further breakdowns in the dollar.
Unemployment is a persistent issue that the government cannot address simply by changing its statistical reports. While the government fiddles with numbers, American business owners are trying to find a way through the problem. Consumers are tapped out and do not have much more room to grow the economy. They are not well positioned heading into this recession unless they are some of the few that own the precious metals.
Access to precious metals, as well as other common goods and services we currently take for granted, could be reduced by other administrations moving legally to protect their internal industries and goods production as the recession nears.
I am leading us back to Constitutional money, or American currency with silver in it. Mistakenly called junk silver, these coins are anything but! They contain real silver and trade at the value of their silver content. It is a reminder to our government that commodity money can work and has worked in the past. Perhaps that is the solution to our problems. We can vote for it by simply purchasing some and keeping it around for a rainy day when our existing currency system is no longer fit for purpose.