Deflation Is Now Creating inflation, Which Will Ultimately Implode Debt And Propel Gold

China, ZIRP and OPEC triggered deflation, lower prices

The two main reasons for deflationary forces are the strongly reduced demand for goods from China and the QE, ZIRP and NIRP programs from the main Central Banks (CBs). Chinese GDP growth of approx. 7% can’t be maintained for an economy the size of the US economy. Especially when all the growth factors boosting the economy, the building of ghost towns and infrastructural projects and competitive wages are exhausted. We just witnessed that railcar traffic in China declined to 2007 levels. In 2015 rail freight volume plunged 10.5% and the economy was supposedly still increasing 6.9%? Which is precisely where things don’t add up. This is confirmed by the data for the first quarter of 2016, which were even worse with rail freight volume plunging 9.4% year-over-year to 788 million tons, according to data from China Railway Corporation. At this rate, rail freight volume for the whole of 2016 will be down 20% from 2014 and will end up where it was in 2007!

First quarter 2016 GDP figures were released on Friday April 15, 2016 with GDP growing by 6.7%, down from a 6.8% gain in the previous quarter, which was in line with expectations of 6.7% though still the weakest since Q1 2009. Retail sales beat (+10.5% vs. +10.4% exp), industrial production beat (+6.8% vs. +5.9% exp) and fixed asset investment beat (+10.7 vs. +10.4% exp). Though China's economy still slowed further in the beginning of the year despite Beijing's policies to revive growth with old-style tools such as lending and construction.

Do you still believe the official 6.7% GDP growth for the Chinese economy? How can one calibrate the negative 9.4% freight volume figures with GDP growth of +6.7%???? In my point of view GDP growth is more likely to be flat or even negative. The Chinese are suffering from the same “make believe stories” as those in the US for obvious reasons. Anyway with China in the past having accounted for 50% of worldwide demand for hard commodities prices have declined substantially for all industrial commodities such as copper, iron ore and coal to name a few. Ask the Australians and Brazilians if they believe Chinese growth still is 6.7%!

Next to the strong fall in demand from China the zero interest rate policies of the Western CBs has kept a lot of businesses much longer in existence than would have been with normalized interest rates. ZIRP or NIRP represent the ultimate form of deflation or lower interest costs. Central Banks pumped $29 trillion into the global economy over the last few years with the Fed alone injecting $4.5 trillion in the U.S. Central bankers were “forced” to take such steps because gridlocked governments didn’t act to put more fiscal stimulus into their economies after the 2008 financial crisis. And as a result of the ultra low interest rates we witnessed much more supply than demand resulting in strongly deflated prices. On top of that OPEC for market share and/or geopolitical reasons opened the oil tap and forced oil prices down from $110/bbl. mid 2014 to $26/bbl. (-76%) mid February 2016. And we didn’t see any improvement in consumer spending because there is no trust in the US economy. Wages didn’t keep up with the inflation of day-to-day household necessities reducing real income, the number of goods people can buy with their money, to 2000 levels.

And now the deflation is creating inflation or higher prices because of the very low prices, the flight into tangible assets and a weaker deflated US dollar

Oversold prices

Since the low in February oil prices have recovered to almost $44/bbl. (13/4/16) or a gain of 69%! In other words we will most likely be looking at strong inflationary forces in 2016 because we have departed from such a low base triggered by the strongly deflationary forces in 2015. Oil is an important part of consumer prices and day to day live think heating, driving and transport and the production of goods.

A kind of similar price development as for oil we witnessed for iron ore prices with prices of $95 per dry metric tonne in July 2014 and $40/t for December 2015 (-58%) and now within a whisker of $US60 a tonne (+50%), sending shares in BHP Billiton and Rio Tinto soaring in London trade. And as main reason for the rise of iron ore prices is mentioned that China’s exports surged 11.5% in March, rising for the first time in nine months, and “thus” soothing fears about the health of the Chinese economy. Again nothing is less true as demonstrated with the railcar shipment volume figures.

Commodities are non-dilutive assets they can’t be printed contrary to paper money hence the liking for tangible assets

Another reason for the higher commodity prices in my opinion stems from a flight from intangible assets (bonds, equities and currencies) into tangible assets like oil, copper and iron ore and agricultural land. People don’t trust the intangible assets (basically any paper promise) any longer with all their artificial backing with strongly diluted paper money from QE, ZIRP and NIRP programs that are clearly not working. Just look at the velocity of money in the US which is at historic lows and look at Japan where funds are not selling their government paper because they don’t know what is available and what they would get in return (10y now yielding -0.084%) leading to strong illiquidity. The Japanese are even issuing CDSs (Credit Default Swaps) in order to generate higher returns (sounds familiar to the AIG CDS debacle?). Germany is also going in that direction with the 10y bund “yielding” now 0.131% only 13 bp from 0%. Anyway it is the increasing uncertainty and mistrust that is forcing investors into tangible assets that will always keep their value, which can’t be said, of paper promises such as paper money. Paper money is no longer worth the paper it is written on! Resources need to mined or lifted out of the earth and the amount of land in the world is not going to be increased contrary to the amount of printed fiat or paper money. Commodities are non-dilutive assets!! Hence their eternal value. Remember this.

The US dollar will fall which will propel gold and silver because of its inverse correlation

The QEs, NIRP and ZIRP have caused competitive currency devaluations. With their money creation they, the CBs, have driven down, diluted the purchasing power (the number of goods that can be bought) of their currencies. The authorities pumped money in the markets in an effort to stimulate the economies, which failed, instead the available tangible assets were bid up or became “worth” more and thus as a result of which paper money became worth less! The additional productivity from the stimulus measures was limited because there was and is no confidence amongst the consumers. Wages haven’t in creased at all because of the huge outsourcing (cheap wages and taxes) and automation. Anyway you can bring a horse to the water but you can’t make it drink.

And thus the third and probably most important reason for the strength in the hard commodities and especially gold and silver is that the monetary policies have failed with all the tools in the toolbox being exhausted which is finally weakening the US dollar, the reserve currency, to which all commodities are inversely correlated. This commodity inflation clearly doesn’t stem from stronger demand for goods stemming from a healthy strong economy but from currency deflation stemming from weak economic fundamentals.

In my opinion all positive factors for dollar strength have now finally been discounted. The Fed keeps on reducing the number of rate hikes because of the weaker economic and corporate figures than anticipated. Next to that the weakness in the Yen and the Euro has kept the US dollar strong for a while. As has been argued by many people the US dollar wasn’t strong because of its sound fundamentals but because the weakness of the other world currencies such as the Euro and Yen, which were artificially weakened because of the QEs and early ZIRP and NIRP programs, which now seem to lack any lasting impact. The Yen, which strongly influences the fate of the dollar, is now strengthening as we have been witnessing because all the Yen depressing measures have failed and because the Japanese current account surplus and repatriation of funds is now putting upward pressure on the Yen.  The rise of the US dollar is over!! And this will be one of the most important factors boosting gold and silver prices going forward.  Next to that the weakness in the US dollar in conjunction with stronger inflationary forces will force interest rates higher.

Inflation will force the Fed’s or investors’ hand to increase interest rates, which will implode the bond market

In order to stay ahead of the curve the Fed might be forced to increase interest rates whilst the economy is not strong at all as confirmed the Atlanta Fed forecasts for the economy reducing GDP estimates for 1Q2016 to 0.3%. The New York Fed's today slashed Q1 growth to just 0.8% (from 1.5% in Feb) and collapsed Q2 growth to 1.2% from 1.9% last week. This cuts the entire H1 estimate from 1.5% to 1.0%.

The economy was purposely made to look strong using manipulated employment and other managed figures though as we know nothing is less true as confirmed by two of the 12 Federal Reserve Banks. It is the art of deception to pretend that everything is honkey dory trying to keep the economy afloat.  It is all one big air balloon. And therefore when inflation figures suddenly start to rise because the percentage strong increases in certain CPI constituents the Fed or the market most likely will force much higher long-term interest rates.  And with all the illiquidity in the bond markets, following the QE programs sucking the bond markets dry, the movements in the bond market could be catastrophic and cause a bloodbath taking the other markets in its path with it. This would force investors to look for assets that would preserve their capital and with the precious metals well inversed to the equities and bonds gold and silver are most likely to become the preferred asset class for insurance. Perhaps you should also have a look into the Federal Reserve having released a 19-page letter on April 14 that it and the FDIC had issued to Jamie Dimon, the Chairman and CEO of JPMorgan Chase, on April 12 as a result of its failure to present a credible plan for winding itself down if the bank failed. Is this a warning sign for what is too come and/or is JPMorgan just too arrogant to take adequate measures?

As a side note I don’t understand why CNBC is going on about all these flawed S&P00 companies and their flawed results (comparing results with estimates and not y.o.y earnings! A sham!) and buy-backs whilst gold has risen by 17% from $1,061/oz. to $1,243/oz. since the beginning of the year whilst GDX rose even by 62%!!! from $13.72 to $22.21. The GDX was created by vanEck and its holdings include most major gold miners listed in the United States and Canada. Some of the largest holdings of the ETF are Goldcorp (GG), Barrick Gold (ABX), Newmont Mining (NEM), Franco-Nevada Corporation (FNV), Newcrest Mining (NCM), Silver Wheaton Corp. (SLW) and Agnico Eagle Mines Limited (AEM). The index is market cap-weighted.

It should be noted that gold shares normally have a beta that is twice the level of the underlying gold price whilst silver mining shares have a beta of 4x the movement in the gold price. So what do you prefer S&P500 stocks at peak levels or gold and silver mining stocks at bottom levels. Where is the value in your mind?

Only 30% of all the silver produced in the world by pure silver mining companies hence their higher multiple than gold mining companies. Silver for the largest part is a by-product of gold copper and zinc and when the production of the base metals falls the production of silver also falls.

Arbitrage from the Shanghai Gold Exchange could force the hands of the LBMA and Comex

As stated many times the currencies can be seen as the ultimate benchmark of your wealth or purchasing power hence why I believe that their current weakness is ringing the bell for the resumption of the bull market in the precious metals. Gold and silver are the mirror image of the health of the reserve currency’s economy and its policies. Hence why the US authorities had to suppress the gold and silver prices in order to avoid the perception of weakness of the US dollar (also see Deutsche Bank’s admittance of silver and gold manipulation). Don’t forget paper money printing equals unrestricted growth whilst physical gold and silver equal discipline, one can only issue so much money as is being matched by newly mined gold. Gold for obvious reasons is seen as a constraint to the (flawed) policies of the politicians hence why they suppress the gold price. With gold as the reserve currency they can’t promise the world to their electorate!!

Though the authorities can only keep the prices suppressed for so long. Suppression is like keeping a ball pushed under water, ultimately the water wins! And it looks like all the factors in favor of gold and silver are coming together. The 19 April pricing of physical gold by the SGE (Shanghai Gold Exchange) in Yuan (physical against cash) could mean the end of the manipulation of paper or gold futures (paper gold versus nominal settlement) orchestrated by the bullion banks and monetary authorities using the LBMA and Comex as their platforms. The physical gold versus cash sets the only right price and if the LBMA or Comex price setting will be lower than the price at the Shanghai Gold Exchange SGE members will arbitrage it and demand physical delivery from the LBMA and Comex participants which will in turn force much higher prices.

Why? Because the paper to physical ratio ranges between 100-300x, in other words for all 100-300 futures contracts on the LBMA and Comex there is only one physical ounce in registered inventories. In other words there is not enough gold in registered inventories (bullion inventories qualified for delivery on the futures contracts) to meet the delivery. And thus it will force the LBMA or Comex to call a force majeure allowing the LBMA or Comex to settle in cash, though this will at the same time render the exchange technically in default and end their viability and credibility. And that situation we are getting every day closer to as is demonstrated by the admittance of Deutsche Bank of silver and gold manipulation.

Deutsche admits to silver manipulation (being a lawyer don’t give me that crap of paying a penalty but not admitting wrongdoing, this is such a fallacy of what justice should be!!)

According to a Reuters article of April 13, 2016 Deutsche Bank AG has agreed to settle U.S. litigation over allegations it illegally conspired with Bank of Nova Scotia and HSBC Holdings Plc to fix silver prices at the expense of investors. Do I need to say more to all those naïve people that don’t believe in conspiracies because they don’t understand the real workings of the governments and the reasons why? You just have to look at the dumping of 10,000 futures in the market on Sunday evenings when the trading volume is at its thinnest. Do you now finally believe what is really going on behind the curtains? Your government in cooperation with the bullion banks is stealing from you. And to counter any arguments that the prosecution by the government means that the government is not involved see the CTFC “investigation” below! Wake up and see below.

What is potentially even more interesting re Deutsche’s admission is the following statement. “In addition to valuable monetary consideration, Deutsche Bank has also agreed to provide cooperation to plaintiffs, including the production of instant messages, and other electronic communications, as part of the settlement. In Plaintiff’s estimation, the cooperation to be provided by Deutsche Bank will substantially assist Plaintiffs in the prosecution of their claims against the non-settling defendants.”

Finally, we'll just remind readers that the US commodity "regulator", the CFTC in 2013 closed its so called five-year investigation concerning allegations that the biggest bullion banks manipulate silver markets and prices.  It proudly reported in September 2013 that it found no evidence of wrongdoing and dropped the probe. This is what it said:

“The Commodity Futures Trading Commission (CFTC or Commission) Division of Enforcement has closed the investigation that was publicly confirmed in September 2008 concerning silver markets. The Division of Enforcement is not recommending charges to the Commission in that investigation. For law enforcement and confidentiality reasons, the CFTC only rarely comments publicly on whether it has opened or closed any particular investigation. Nonetheless, given that this particular investigation was confirmed in September 2008, the CFTC deemed it appropriate to inform the public that the investigation is no longer ongoing. Based upon the law and evidence as they exist at this time, there is not a viable basis to bring an enforcement action with respect to any firm or its employees related to our investigation of silver markets.”

In light of this confirmation that the CFTC's probe was "lacking" perhaps it is perhaps time for the so-called regulator who at the time was headed by ex-Goldmanite Gary Gensler, to reopen its investigation? See how full of @#$%& these people really are and how one can’t trust these institutions and especially when they are headed by ex Goldman employees like Gensler and the NY Fed president William Dudley. Other Goldmanites are Carney of the BOE and Draghi. Do you really think that these people don’t talk to each other? Take off your naive hat and start thinking manipulation, conspiracy, inside information and front running!!! All services performed by Goldman. Goldman just paid $5+bn in penalties for their mortgage  security fraud with shareholders money (basically stealing twice!) and not the partners’ money, which should have been the case.

Anyway this admission and cooperation by Deutsche and the SGE Yuan pricing should ultimately lead to ending the silver and gold manipulation. In other words interesting times for gold and silver especially in light of all factors that are playing.

 © Gijsbert Groenewegen, [email protected]