first majestic silver

When The History Books Are Written…

March 5, 2015

It’s Wednesday morning; and again, I’m having difficulty focusing on a single “horrible headline” – or if you will, a single “horrible topic.” I could start by following up with yesterday’s “PDAC, the Epitome of Mining Ineptitude” with this article from Brent Cook – a geologist who has written a mining newsletter for years – titled “Exploration cuts killing miners’ future.” And this one, of how Australian gold production rose in 2014; but “due to lower prices, Australian gold miners increased the ore grades they were targeting, and pushed their processing plants even harder. In other words, though “superficially, the figures give the impression of a healthy and vibrant industry, “higher grades and greater throughput shortens mine lives.” In other words, a “perfect storm” of an essentially dead development pipeline; collapsed capital availability; plunging capital expenditure; a vanishing junior mining sector; and cannibalistic “high grading” have indeed set PM mining for the “Armageddon” we forecast. Throw in the borderline fraudulent, but more aptly characterized “optimistic” mining resources we discussed last week, and said “storm” only appears more ominous; as global demand continues to rise, amidst the relentless money printing blitzkrieg of desperate, can-kicking Central banks.

To that end, I see that the oil industry, too, is plagued by accounting “vagaries” that will ultimately cause much pain to eternally optimistic investors, who simply don’t understand that the utterly massive oversupply – caused by decades of Central bank fostered overcapacity – is doomed to implode high cost oil producers for years to come. Apparently, the SEC, in its superior wisdom, requires oil companies to base year-end reserve statements on the average oil price of the first day of the past 12 months. And thus, despite oil prices ending 2014 at roughly $50/bbl, U.S. E&P (Exploration & Production) companies largely used a price closer to $95/bbl to estimate year-end reserves. Payback will obviously be a “b—h” in 2016; and isn’t it a “hoot” that whilst oil companies are given full leeway to lie about their reserves, gold and silver mining companies are required to utilize price assumptions based on market prices?

Finishing the point, I can’t wait to see this morning’s EIA (Energy Information Administration) oil inventory report. Earlier this week, I wrote of the inevitable “death of (unfounded) bullishness” when Central bank-supported stock and bond markets can no longer support the utter explosion of “horrible headlines” that expands with each passing day. Nowhere is this more evident than in the “oil PPT” supported crude oil market; where for the past three weeks, $49/bbl WTI has been defended with the same veracity that Cartel “lines in the sand” have sought to quell PM enthusiasm for decades. Las/t night, prices “surged” to nearly $51/bbl on news that API (American Petroleum Institute) “only” rose by 2.9 million barrels last week – to a new all-time high – versus “expectations” of a 3.9 million barrel build. In other words, said PPT-inspired lunacy is causing people to not just make lemonade out of lemons, but sweet nectar.

Only in Cartel-suppressed PM markets is good news bad and bad news good; and this is decidedly bad news for oil prices. To that end, if I see one more article about “speculation that lower rig counts will produce a supply response later this year,” I’m going to puke. Given the worldwide need for cash – particularly from junk-bond financed shale producers and socialized nations basing spending programs on far higher oil prices; let alone, “market share wars” every bit as vicious as the “final currency war,” there is no conceivable way that supply will slow down any time soon, regardless of how weak demand gets. This is what I wrote in last month’s “supply response” – noting how crude oil and Precious Metals are on the opposite ends of the “fundamentals spectrum,” with the former amidst a long-term supply/demand nightmare, and the latter, a sweet dream. And putting the “nail in the coffin” of said economic nightmare – and presaging today’s principal topic, last night’s Japanese PMI readings were so ugly, it calls into question if “Abenomics” is even viable; as not only did the PMI service index “unexpectedly” plunge from 51.3 to a contractionary 48.5, but the employment component plummeted to its lowest level in 2½ years. But hey, Japan’s hapless octogenarians just gave Shinzo Abe an undisputed “license to print” in December’s snap elections, so I guess it’s 200 Yen to the dollar or bust!

Which brings me to today’s principal topic, of how Central bank insanity has brought the world to the cusp of political, economic, and social Armageddon. Not that this topic is new to Miles Franklin Blog readers. However, at this point, all but the blindest, most jaded establishment apologists are aware of the accelerating “currency wars”; which, as noted above, we first discussed more than two years ago. To that end, what catalyzed this particular piece was this quote from David Stockman regarding ECB QE, neatly consolidating my beliefs into one short paragraph…

“All that remains is for the ECB to indulge in a final burst of QE-style money printing in a futile effort to reignite growth. But the Draghi monetary tsunami is nothing more than a last incendiary hurrah. It will cause the Euro to eventually plunge through parity with the dollar, meaning that the tailwind of translation gains that flattered S&P 500 profits since the turn of the century will turn into a ferocious headwind in the years ahead, as the euro stumbles toward its final demise.”

In other words, the quintessential description of said currency wars; combined with Central bank desperation – and prayer – that they can “grow into” their massive, exponentially growing debts by simply printing money and lowering interest rates to – and below – zero. Of course, it can never happen, as “Economic Mother Nature” does not allow growth once peak debt causes the “diminishing returns” of money printing to turn negative. And whilst historic market manipulation and propaganda have enabled these trapped rats to “extend and pretend” a tad longer, in the big scheme of things the clock is ticking louder than ever – with little time remaining before the “unstoppable tsunami of reality” crashes into all global shores.

And when I say “all,” I cannot emphasize enough that it already has on shores where billions of global denizens reside; as evidenced by the all-out collapse of dozens of currencies that we predicted not this year, but last year – when it became painfully apparent that “2008 redux” was approaching, yielding a global “flight” to the superior liquidity of the reserve currency. To wit, the below comment from my 2014 predictions, published 15 months ago…

“Multiple currencies will experience dramatic declines relative to the dollar.  The “final currency war” is clearly underway; in our view, catalyzed by the Fed’s 2012 commencement of QE3; the ECB’s 2012 announcement that if needed, it would engage in open-ended sovereign debt monetization; and the Bank of Japan’s 2013 announcement that it intends to double the money supply in an attempt to dramatically weaken the Yen.  Consequently, these “big three” Central banks have exported copious amounts of inflation worldwide – as highlighted in “The most important article I’ve ever written.”  “Tapering” notwithstanding, the global trend of increased money printing must continue – and eventually, accelerate – as history’s largest Ponzi scheme plays itself out.  Consequently, the “race to debase” will intensify, yielding increased worldwide inflation.  In time, this “cancer” will rise to the top of the totem pole, destroying the world’s “reserve currency” itself.”

And “final currency war” it indeed has become; with this morning alone, India and Poland becoming the 20th and 21st Central banks to reduce interest rates since year-end, following China becoming the 19th last weekend. And oh year, as I write the Euro has just broken below the 12-year low of 1.11 achieved in the wake of the “surprise” Syriza election victory. Who knows how large the list of rate-cutters (and repeat rate-cutters) becomes before Janet Yellen follows up last week’s “most unequivocally dovish FOMC statement in memory” with the inevitable “Yellen Reversal” – i.e., initiation of QE4? Given the dramatically increasing – global – economic headwinds, it’s difficult to believe it won’t be this year; particularly when her band of money printers are making comments like Chicago Fed President Charles Evans’ this morning

Regarding last night’s “surprise” Indian rate cut – which subsequently, has the Rupee within shouting distance of its all-time low – it is particularly alarming because it was only days ago when the Reserve Bank of India was given a “legal mandate” to “target inflation.” Which it clearly is doing, in deeming the rate cut a “pre-emptive” strike against “deflation.” And this, as the supposedly “gold-positive” Modi government took a page from Alexis Tsirpas’ “book of treason” by forsaking the wishes of those that elected him, by neglecting to reduce the onerous gold and silver tariffs that have sapped official gold and silver demand, leaving a booming, expensive black market in its wake. It’s no coincidence the Rupee’s all-time low was achieved in the summer of 2013, when the aforementioned PM tariffs were instituted to (as it turns out, temporarily) quell the fears of a billion-plus gold and silver loving Indians. And now, with the Rupee again plunging, as the Indian economy dramatically slows, it wouldn’t surprise me one bit if my long-standing fears of Indian monetary Armageddon become front and center 2015 issues.

Yes, when the “history books are written,” it will be Central banks blamed for essentially all of what destroyed the global, “modernized” economy of the early 21st Century. True historians will realize the root of such evil was sown in August 1971, when the global gold standard was abandoned; but all will realize that whatever it was that was “working” beforehand, decidedly broke in 2008, when the terminal phase of history’s largest Ponzi scheme commenced; and went “off the rails” when Central banks went hog wild printing money circa 2012.

And one more note before I stop, as I’d be remiss if I didn’t mention the “financial Frankenstein” created yesterday, by the merger of the sub-prime divisions of AIG and Citigroup by a fly-by-night company called Springleaf, ticker LEAF. Yes, the absolutely ugliest, most destructive practices – by the ugliest, most destructive companies – have joined forces in what is unquestionably an ominous sign that the long-awaited “end game” has arrived. In other words, the “quest for yield” in a world of QE, ZIRP, and – increasingly – NIRP has caused the most dangerous demons of old to be re-awoken, to the applause of a PPT-supported Wall Street. How long will it be before such cheers turn to Lehman-like jeers? No one has a crystal ball, but methinks it won’t be too long. Which, by the way, is the same “timeline” I anticipate for the global realization that only gold and silver are real money, whilst all others are worthless toilet paper.



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Andrew ("Andy") Hoffman, CFA joined Miles Franklin, one of America's oldest, largest bullion dealers, as Media Director in October 2011. For a decade, he was a US-based buy-side and sell-side analyst, most notably as an II-ranked oil service analyst at Salomon Smith Barney from 1999 through 2005. Since 2002, his focus has been entirely on precious metals, and since 2006 has written free missives regarding gold, silver and macroeconomics. Prior to joining the company he spent five years working as an investor relations officer or consultant to numerous junior mining companies.

Nearly 40 percent of all gold ever mined was recovered from South African rocks.
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