Dear TexMetals customers:
I am writing to provide you with an update on precious metals inventories. We are presently out of stock on many products. I want to begin by quoting an article I posted on July 8th, 2015
“It is important to understand how and why supply constraints occur during periods of falling prices, and why precious metals premiums consequently spike. Let’s use an extreme example to illustrate the nature of how the physical metals markets move.
a. Let’s assume the spot price of silver is $15 and subsequently falls to $10.
b. Let’s assume the annual average demand for physical silver is $1B.
In this scenario, if the demand in dollar terms remains flat, the manufacturing output would need to increase by 50%. The mint would need to increase minting capacity from 66.67M coins to 100M coins - a huge increase.
Now, if the silver spot price fell by 33% in a condensed time frame, you can be certain that demand would increase precipitously. If we assume demand (in dollar terms) doubles, the mint would need to increase production from 66.67M coins to 200M coins. What if demand triples or quadruples? You get the idea. Over the long term, the US Mint might be able compensate, but certainly not in the short term. No manufacturing operation could. Manufacturing is inelastic with respect to short term scalability.
Then you have the domino effect:
- The US Mint goes on “allocation", limiting supply to authorized purchasers.
- This supply constraint, in the midst of rising demand, forces dealers to raise premiums.
- Rising premiums on US-minted products induces buyers to purchases other sovereign coins, like Canadian Maples, or privately-minted products.
- The increase in demand for these products creates the same manufacturing constraints for these organizations that are affecting the US Mint.
- The problem compounds and lead times extend until demand cools, supplies increase, and the coil unwinds.
These reverberations in the market are Economics 101. The physical precious metals market is minuscule relative to all other asset classes, and small shocks can create major supply shortages.”
Supply constraints began surfacing in July at the US Mint, and subsequently the Canadian Mint encountered severe manufacturing disruptions which greatly limited supply on gold, silver and platinum. The recent tremors in the stock market and decline in precious metals prices have compounded the problems in the supply chain.
As our loyal customers know, if we don’t have a product in stock, we don’t sell it. Given the recent events in the market and the supply chain, we are out of stock on many products. Please refer to the information below for the most recent information about our supplies:
TEXAS ROUNDS AND BARS: This past week we had an issue with a Brinks delivery which delayed a new shipment of Texas Rounds. We will have 20,000 rounds available beginning next Tuesday 9/01, with 20,000 rounds arriving every Tuesday thereafter. At current demand, it is unlikely that we will maintain deep supplies for the next couple of months. We are expecting a limited shipment of 10 oz Texas bars next Tuesday also. Premiums remain normal on these products, and we are hoping to keep these premiums unaffected by supply constraints.
US MINT: Presently, there are no delays on gold coins, and premiums for gold products remain normal. Silver American Eagles are on allocation, and allocated levels were extremely low this past Monday, 8/24. As of this writing, we presently have 50,000+ Silver Eagles left in stock. We expect further supplies out of next week’s allocation, but the volumes are presently unknown. We are attempting to keep premiums as the lowest in the industry, but they nevertheless remain elevated throughout the supply chain.
ROYAL CANADIAN MINT: Supplies for Gold Canadian Maples remain extremely tight, and premiums have elevated by a couple of dollars. Sales of Silver Canadian Maples, Birds of Prey Series coins, and 100 oz bars are suspended and unlikely to become available until late September at the earliest.
PERTH MINT: Presently, there are no delays on gold coins, and premiums remain normal. Supplies on 1 oz gold bars remain tight, but we do expect limited supplies to arrive by 8/31 at the latest. As of this writing, we presently have 15,000+ Silver Spiders in stock, as well as 25,000+ ozs of ½ oz Sister Cities coins. Premiums on both coins remain normal. We expect the new 2016 Silver Kangaroo to arrive by late September, but we do not yet have a firm date on their arrival.
Supplies for Platinum Platypus remain very limited. We are having difficult keeping any in stock. We are hoping to secure another small lot by early next week, 8/31.
AUSTRIAN MINT: We are expecting a shipment of 10,000 Silver Philharmonics due to arrive on Friday 9/04. The premiums remain normal at the present time. Supplies of Gold Philharmonics are presently constrained.
GENERIC 100 oz BARS: We have an order for 250 100-oz Republic Metals Silver Bars (25,000 ozs) due to arrive September 17th. Barring any unforeseen supply changes, we do not expect to have 100 oz bars in stock prior to then.
I hope this offers you a general overview of our present expectations for supply. Please note, this information may change as the industry reacts to these constraints. We will do our best to keep you posted on the latest developments.
As always, thank you very much for your business and your loyalty.
CEO, Texas Precious Metals
Going completely unnoticed, Reuters on Wednesday issued an exclusive report stating that South African miners plan to target platinum as central bank reserve asset in an effort to rejuvenate the flagging mining industry. To wit (emphasis mine):
South Africa's mining industry, unions and the government have committed to a broad plan to stem job losses, including boosting platinum by promoting the metal as a central bank reserve asset, according to a draft agreement seen by Reuters on Wednesday.
If successful, this could be a huge game changer for not only platinum, but the precious metals complex more generally.
In this post I want to share an interesting observation I recently ran across. It has to do with Tobin's Q and the long term chart of the S&P 500. Maybe it's only a coincidence, but maybe there's something more to it. I'll present you with the data and let you make that call.
First, if you're not familiar with Tobin's Q, Investopedia explains it as, "A ratio devised by James Tobin of Yale University, Nobel laureate in economics, who hypothesized that the combined market value of all the companies on the stock market should be about equal to their replacement costs. The Q ratio is calculated as the market value of a company divided by the replacement value of the firm's assets."
"For example, a low Q (between 0 and 1) means that the cost to replace a firm's assets is greater than the value of its stock. This implies that the stock is undervalued. Conversely, a high Q (greater than 1) implies that a firm's stock is more expensive than the replacement cost of its assets, which implies that the stock is overvalued. This measure of stock valuation is the driving factor behind investment decisions in Tobin's model."
Don't worry if you're not grasping technicalities of Tobin's Q. What I want to convey is that Tobin's Q is a nice valuation metric and, when graphed over time, it moves in a very established channel. Jill Mislinksi from Advisor Perspectives issued a nice research piece the other day that really dove into Tobin's Q and market valuations. I'm borrowing the following chart from that article:
The graph above casts a wide net, calculating the Q Ratio against the Vanguard Total Market ETF (VTI). What you can see is that the Q Ratio generally oscillates between 0.30 where markets are oversold & undervalued and 1.10 where markets are overbought & overvalued. The mean over the last 115 years is approximately 0.70 and that includes the massive upward distortion from the dotcom bubble. That aside, let's assume that 0.70 is the average for the entire stock market. That means today's reading of 1.09 is at the very high end of all previous stock market cycles (dotcom bubble excluded). Does that mean a market drop is imminent? Of course not. The Q Ratio could continue rising to levels seen before - we just don't know. However, if you're playing the odds, caution is certainly warranted here, especially in light of the recent selloff.
Now let's take the analysis a little further. Let's assume we are indeed at a market top and we're poised to correct. What kind of downside are we looking at? Well if you look back at the hundred years between 1900 and 2000, just about every market top (1.0-1.1) was immediately followed by a drop to the lower bound of 0.30 - almost without exception. That trend changed, however, in the early 2000s. Notice how the Q Ratio was not allowed to correct to its 100 year natural low. Through the Fed's use of magic monetary policy, the ratio only made it back to the 100 year average of 0.70 before re-inflating during the housing bubble. Do you remember the Great Recession once housing went bust? Even then, Tobin's Q only correct to 0.57, well above the lows of previous cycles going back over 100 years. My point here is that policy makers have not allowed the market to adequately purge the excesses of back-to-back stock market bubbles. That is a bad, bad thing. Today, we not only have the excesses still in the system from the dotcom and housing bubbles, but now we have the excesses that have built up from worldwide ZIRP (zero interest rate policy) and QE.
So what happens if/when Tobin's Q is actually allowed to correct back to historical lows? For that we look at the long term chart of the S&P 500.
The Q Ratio measured 1.09 in early August as shown on the first graph. For it to fall to the historical levels at which all bear markets bottomed from 1900-2000, it would need to drop 0.79, or 72.5%. Putting that into context: On August 3, 2015, the S&P closed at 2,098. A 72.5% correction from that level puts it roughly at 575. I've circled that point on the graph above. Impossible, right?
Now take a look at the exact same chart, but this time with the addition of a simple trend line.
Using the the most basic tenets of technical analysis, lines of support and resistance, one can argue that a realistic downside target for the S&P is in the 550-600 neighborhood. That matches up perfectly with the Q Ratio argument laid out above.
Understanding that these are just two methods of many by which to analyze the market, I found it interesting that they both point to precisely the same level. I'll leave it up to you to decide if they're relevant or not.
Remember that Pet Rock that nobody wants and will most likely go back to $500? Yeah, well, it's now outperforming the major market averages in 2015. Granted, it's the least smelly turd in a pile of turds, but it's still doing the best on a relative basis.
The "markets" are very broken. That much should be clear after yesterday's historic volatility. I have been saying for months (such as here, here, and here) that stocks are/were topping and that the future did not look good for the bulls. The reasons are many and I encourage you to read through some previous posts to get a flavor for why I feel the way I do.
Regardless, here we are, the morning after an 1,100 pt drop in the Dow (although in "only" closed down about 600 on the day) and back-to-back 7%+ drops in the Chinese stock market. Is it time to panic? Well, not yet. Let me explain.
I believe that three consecutive days of stock market routs have acted like a cold slap across the face of money managers and institutional investors across the globe. It likely snapped them out of the zombie-like, knuckle-dragging, "stocks-can-only-go-up" mentality that they've been in for the last three years. It was, in a phrase, their come-to-Jesus moment. Right now institutional investors (hedge fund managers, pension funds, mutual funds, etc) are looking around saying, "something isn't right here." Stocks like GE and Apple shouldn't move 10% up and down and back up again in a matter of seconds. We're talking about changes in market caps of hundreds of billions of dollars faster than you can count to five. There are fundamental, structural flaws in the way the market operates (here's looking at you HFTs).
Understanding that the market has topped and that the underlying mechanism is broken, fund managers will now look at their big pile of overpriced, overvalued equities and figure out a way to get the hell out without sending prices in a downward spiral. That's where you, dear retail investor, come in. What will happen next is meant to sucker every last buyer into the market. No fund manager wants to be left holding the bag when the market tanks. That's why over the next days, weeks, and possibly months, there will be a massive, institutional investor-funded rip-your-face-off rally that will serve to turn yesterday's fear back into good old fashioned greed. Once they get the rally started, it will turn into a virtuous cycle as momentum-chasing algorithms start buying into the rally. Then, retail investors, who don't want to be left behind but by this point will be late to the party, will start buying. So once institutional investors fire this rally up, algos and retail will take the ball and run with it, allowing those very same institutions to sell into strength that they initiated, ultimately exiting those overpriced, overvalued equities. In graphical terms, this is what it will look like:
The rally from Monday's close will be fast and furious. How high will it go? I've chosen the 2050 level on the S&P to represent resistance (green line), but it may end up being even higher - maybe 2077, which is its 200 dma. Whatever the rally ends up being (the first upward pointing blue dotted line), it will have to be convincing enough to lure investors back into the market. Bear market rallies (well, technically we're only in a "correction" right now) can be ferocious and I expect this next rally to be no different. Remember, some of the biggest single day moves of all time came during the 2008/2009 market meltdown, so don't be fooled.
After a while, long after institutions have unloaded their shares, the rally will stall and roll over. With big money exiting the market, there won't be any foundation on which to build a sustained upward move. That's when the stuff hits the fan. Greed will turn back to fear and the selling starts anew. Perhaps slowly at first and then in a whoosh (remember, stock take the stairs on the way up but they take the elevator on the way down), the bottom will fall out, as marked by the second dashed blue line.
To summarize, the worst thing that can happen in the markets right now is a hard rally, effectively erasing much of the losses from the previous days. Unfortunately, that's exactly what I think is about to happen.
The S&P 500 has once again entered the Danger Zone as of trading Thursday morning. Previous drops to this area have been met with sharp v-shaped rallies....but will this time be different? Its 50 dma, which had been providing support, now has turned to resistance. Similarly, the 200 dma has been providing support in its own right, but that appears to be wearing thin with each passing day. Weakness is found all over this chart so I would expect the slow burn to continue. It's worth noting that the index hasn't had three consecutive closes below its 200 dma in over 10 months (Oct 2014). If this happens, then look out below.
Today I'm taking a look at the weekly chart of gold going back a couple of years. Given all of the turmoil we've seen in the metals markets (both precious and base metals) over the last two months, I was surprised to see just how resilient gold has been. I've outlined the tidy little trading range that it's been in for the better part of two years. With multiple touches of the top and bottom boundaries, this has become a very reliable and strong pattern - especially given the span of time in which it has occurred.
The metals takedown in July did nothing more than drop gold to the lower bound of its channel. You can see that support has held for three consecutive weeks and now it's starting to rebound again. Looking back in time, gold has found support at the lower trend line multiple times and subsequently rebounded every single time back to the upper bound. There's an old saying, "The trend is your friend until it's not," so in that spirit, I'm expecting gold to make a move back to the $1200-$1250 area. We'll circle back and re-evaluate if/when that time comes. But in the meantime, I'm thinking gold is good for $100 gain from current levels.
As the title of today's post suggests, Silver is starting to paint an inverse head-and-shoulders on the daily chart. So far, it has a well-defined left shoulder, a nice rounded head, and the beginnings of a right shoulder. There's no guarantee that it will continue to carve out the right shoulder, but at the moment, the pattern is certainly in play. If it does play out to completion, then a break above $15.60 will have bullish repercussions. Calculating the measured move suggests a upward advance of about $1.20 from the breakout point ($15.60), or somewhere around $16.75.
I believe the odds of this happening are strong, particularly because volume has been a confirming indicator. On recent advances, volume has been very strong and on recent declines, volume has been weak. This is classic backing and filling action seen during upward moves. While it's too early to trade this pattern, it's worth watching for the breakout. Not only is there a tradeable 10% to be had on the upside (if it comes to fruition), but it suggests a larger trend change for silver more generally.
As originally predicted in December, and reiterated two weeks ago, crude oil is now on a way ticket to $35. Heavy, persistent selling this morning has pushed crude below its March lows effectively taking out what little support it still had. As a refresher, here's the chart posted back in December:
As you can see, there is no support until you get to the lows from 2009, which are in the $33-$35 area. Technical analysis has been very effective of late, and Crude is a perfect example of this. When it broke its long term trendline as shown above, the measured move placed it in the mid-$30s. Everything has since gone according to plan.
Once crude hits $35ish, I expect a sharp counter trend rally back to the low $40s. From there, it's anyone's guess where this thing goes. If the world economy is indeed rolling over, then crude, the world's most important commodity, will certainly lead the way. Below $35, I'm seeing decent support in the mid $20s and strong support in the high $$ teens (2002 lows). No matter how you slice it, crude is weak and it's only going to get weaker.
Starting with the Dow Jones Industrial Average, we can see the slow motion rollover that's been taking place since late 2014. Selloffs have been met with sharp rallies which have been met by more selloffs and even more rallies. This is classic action during a market top. Big investors - hedge funds, pensions, investment funds, etc. - need to unload massive amounts of shares without overly influencing the market. They obviously want the best prices possible, so they have a vested interest in keeping the market elevated while they distribute. Meanwhile, the dumb money continues to buy their shares thinking that the bull market will continue on its merry way failing to recognize the horrendous internal breadth that's developed over the last six months. So you have very big institutional sellers distributing shares to a group of dumb money investors. This battle manifests itself in textbook style on the chart above.
Why am I so confident the markets have topped? Specific to the DJIA, it just had its first "death cross" in four years (the 50 dma crossing below its 200 dma). In addition, it's made a series of lower lows, now trades below both moving averages, and the MACD and RSI continue to confirm that sellers are in control.
For the most part, the same story applies to the S&P 500 and the Russell 2000. The declines aren't quite as advanced as the DJIA, but they're not too far behind. In reality, these indexes are just catching down to the Dow Transports, which I've posted about many times. Remember, the DJTA is a leading indicator and it's been breaking down badly for many months:
I'm seeing topping action everywhere I look - and this doesn't appear to be a "buy the dip" type correction either. We are waaaaaaaaay overdue for a serious correction. Invest accordingly.