Greg Weldon: Expect A 3+ Year Up-Move In Metals As Banks Counteract Debt Deflation

|
Includes: AAAU, AGQ, AWTM, BAR, BBSA, BIL, CLTL, DBS, DFVL, DFVS, DGL, DGLD, DGP, DGZ, DLBS, DSLV, DTUL, DTUS, DTYL, DTYS, DZZ, EDV, EGF, FIBR, GBIL, GDX, GLD, GLDI, GLDM, GLDW, GLL, GOVT, GSY, HYDD, IAU, IAUF, IEF, IEI, ITE, IVOL, OPER, OUNZ, PGM, PHYS, PLTM, PLW, PPLT, PSLV, PST, PTM, QGLDX, RINF, RISE, SCHO, SCHR, SGOL, SHV, SHY, SIVR, SLV, SLVO, SPTL, SPTS, TAPR, TBF, TBT, TBX, TLH, TLT, TMF, TMV, TTT, TUZ, TYBS, TYD, TYNS, TYO, UBG, UBT, UDN, UGL, UGLD, USDU, USLV, UST, USTB, USV, UUP, VGIT, VGLT, VGSH, VUSTX, ZROZ, ZSL
by: Money Metals Exchange
Summary

This week brought more big moves in precious metals markets. The biggest mover was silver.

The odds of a more dramatic half-point cut by the Fed are diminishing as the yield curve begins to straighten out from its recent inversion. The 30-year Treasury yield is back above 2% while the 10-year surged above 1.5% on Thursday.

Greg Weldon of Weldon Financial breaks down the recent move in silver, and also gives us his thoughts on the pullback we saw on Thursday.

Greg also tells us at what price on the downside he expects will provide major support in both gold and silver if we do see a further pullback from here.

Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

Later in today’s program, we’ll hear a fascinating interview with Greg Weldon of Weldon Financial. Greg breaks down the recent move in silver, a move off of a breakout point he called spot on on this program a few weeks ago, and also gives us his thoughts on the pullback we saw on Thursday.

Greg also tells us at what price on the downside he expects will provide major support in both gold and silver if we do see a further pullback from here. So, don’t miss my interview with the man they call the Gold Guru, coming up after this week’s market update.

This week brought more big moves in precious metals markets. The biggest mover, no surprise, is silver.

The silver market spiked up to as high as $19.75 mid-week, before finally succumbing to heavy selling pressure on Thursday. The selling continued into Friday morning, as the white metal fell all the way back to $18 before rallying strongly off that level. As of this recording, spot prices come in at $18.69 an ounce as silver hangs on to a weekly gain of 1.4%.

Silver continued to show strong relative strength versus gold earlier this week, sending the gold-to-silver ratio below 80 - its lowest reading in more than a year.

Gold ran into resistance around the $1,550 level for the second straight week before pulling back. The monetary metal currently trades at $1,520 per ounce, essentially unchanged now since last Friday’s close.

Turning to platinum, the latest precious metal to break out of a long consolidation base, touched the $1,000 level for the first time since early 2018. Platinum prices are now settling down at $958, but are still registering a gain of 2.5% this week.

And finally, palladium has regained its premium over gold on the heels of a 1.0% weekly advance. Palladium prices currently come in at $1,552 per ounce.

Looking ahead to next week, metals investors should brace for a continuation of volatile market conditions. We’re seeing some near-term overbought signals, coupled with relative weakness in gold and silver mining stocks, which sold off hard on Thursday.

For long-term gold and silver bulls, pullbacks down to more sustainable trend lines would be welcome developments.

Volatility may begin to ratchet down ahead of the Federal Reserve’s policy meeting on September 17th-18th. Then, as is the usual pattern, markets will likely move in reaction to the Fed’s decision. It is widely expected to be a quarter point rate cut, and based on today’s weak jobs report, that anticipated cut appears to be solidifying.

The Fed has also ended its Quantitative Tightening program sooner than originally expected. It is now effectively expanding its massive balance sheet by reinvesting interest back into Treasuries and swapping mortgage-backed securities for Treasuries.

The odds of a more dramatic half-point cut by the Fed are diminishing as the yield curve begins to straighten out from its recent inversion. The 30-year Treasury yield is back above 2% while the 10-year surged above 1.5% on Thursday.

Still, the major trend appears to be that of falling yields across the board. If a recession hits in the coming months, the Federal Reserve can be expected to take its benchmark rate down to zero - or perhaps even below zero. Former Fed chairman Alan Greenspan said in an interview this week that it’s only a matter of time before negative rates arrive in the U.S.

Globally, more than $16 trillion worth of paper promises now carry the promise of a negative return. The skyrocketing proliferation of negative-yielding bonds across Europe and Japan over the past couple years is perhaps the most head-scratching asset bubble of all time.

The question is whether it will get bigger - much bigger - when rates in the U.S. turn negative, or whether a mass exodus from these losing propositions occurs first. Either way, a bond offers more risk than reward these days - or, as others have put it, bonds now offer return-free risk.

The nominally positive yields still available on U.S. bonds will almost certainly translate into negative real yields as the Fed pursues its “symmetrical” 2% inflation target.

Well now, without further delay, let’s get right to this week’s exclusive interview.

Mike Gleason: It is my privilege now to welcome back our good friend Greg Weldon, CEO and president of Weldon Financial. Greg has decades of market research and trading experience specializing in the metals and commodity markets, he even authored a book back in 2006 titled Gold Trading Boot Camp, where he accurately predicted the implosion of the U.S. credit market and urged people to buy gold when it was only $550 an ounce. He's been making some other excellent calls in the metals here recently, and it's great to have him back with us.

Greg, thanks again for coming on and welcome. How are you?

Greg Weldon: I'm great, thank you Mike. My pleasure. I'm just very grateful that the storm spared us the carnage that it inflicted on The Bahamas. I'm here in Jupiter, Florida, and it was supposed to be a direct hit here, so it was a pretty stressful holiday weekend down here.

Mike Gleason: Yeah, lots of different models that were kind of all over the place with that, but yeah, good thing for your part of the world there. I'm glad to hear that.

Well, for starters here, Greg, you nailed it yet again. We spoke back at the end of June and you were on the verge of making a major move into silver, and you're saying that if we could just take out $16.20, it would run pretty quickly from there, which it finally has.

So give us a sense of what you've been seeing here recently in silver and what finally got the white metal moving, which got well over $19 earlier in the week. Now it is suffering a pretty big pullback here today as we're talking late morning on Thursday. So let's start with silver, Greg. What did you see that led you to believe that we were finally going to break to the upside from that years-long trading range and then also talk about this pullback here today?

Greg Weldon: Well, I think it's actually a common thread to both parts of the answer to your two-part question. And the first part is, what we saw was a dissociation in gold and silver, much more so gold, clearly from the dollar and the spread of gold rallying and then making new highs in such a widening basket of currencies, a lengthening list of global currencies. And it wasn't just, you know, some of the emerging market currencies where you can no longer accept the local currency in a place like Angola, a big OPEC producer... Pakistan, Argentina, of course, the currency blown up since even more. But then you had places like Australia and Sweden, and it fed through to the whole thing in Europe where, you know, you had the Swedish Central Bank and the Swiss National Bank with interest rates that were beyond minus 1% at the official rate.

And the bottom line for me, Mike, the whole time, was you know the dollar is going to have to be the relief valve because you have this intense disinflation deflation building just from the pure fact you have so much sovereign debt in a negative interest rate, and I think that this was a big misstep by the central banks globally, particularly in Europe, because the goal was to kind of do what the Fed did at one point up to 2009, which was create a scenario and create an environment where it kind of forced you and your money into risk assets. The Fed did this very effectively after the 2009 crisis and reflated through the stock market and let consumers borrow again, and so on and so forth.

In Europe, though, the misstep has been kind of in terms of guidance. The BIS did a really interesting study on this not too long ago. It's 80-something pages. I read the whole thing. It was fascinating in terms of forward guidance to where the ECB basically said there's no scenario that will be good enough, that would even cause us to think about raising interest rates in the next year - this is what they said a year ago. They should have been raising them by now.

But that forward guidance is such that it caused fear among investors, among households and consumers, and instead of spending, instead of investing in stocks, what they did was, they were so fearful that the message here was what does the Central Bank know that we don't know that's coming down the pike next? That makes them so afraid to even contemplate raising rates to zero that this was an issue now where you're willing to pay a government for 30 years to safeguard your cash. I mean, that is insanity, and it draws all that money out of the real economy and boom... this is what you have in Europe. It's an absolute mess.

You tie all this together, given the European Central Bank situation, what are they going to do? It left the dollar, it leaves the Central Bank here in the U.S., the Fed, as the one that has to move. We said way back in August, this wasn't going to be quick. This was going to be a multi-step process to get the Fed to where they are today. I think the Fed made two mistakes. They hiked rates in December when they shouldn't have. And then they didn't give any kind of hint of forward guidance at the last central bank meeting when they did, in fact, cut rates. And now you're even in a more intense situation where the fixed-income markets [are] demanding even more rate cuts down the road... throw in the Chinese trade factor and you've got a real mess.

And the bottom line out of all of this, I can shave down what's a really long answer into a very short one. What you have here is growing lack of confidence, anxiety, if not even fear and discomfort around all paper. And it's around paper currencies, paper debt. It's all the same, it's all one big IOU. And the central banks are going to keep doing this - and what they going to do next time around, $23 trillion in sovereign debt here in the U.S. versus nine? Are they going to print six to 9 trillion this time around? Well, if they do - and they probably will because, you know, they don't want a debt deflation. It just creates enormously bullish outcomes on the probability curve for the precious metals. And we saw that developing, we saw the way the currencies were acting, that gold had broken away from the dollar, gold was rallying with the dollar. That was huge.

We swapped into silver because the gold/silver ratio had gotten completely out of whack, a 30-year high, and you knew then that there was a point and it was really kind of the next terrace, the next round of this trade dispute where people became really concerned that they're going to go down such a deep hole here that maybe the central banks are not going to have such an easy time to lift them out of it. And then it became a monetary move more than kind of a bigger-picture emerging market, you know, global macro move. Now it's strictly a monetary move. And that's when silver and even platinum just broke out.

Mike Gleason: Silver is outperforming gold now after lagging gold earlier in the rally. We talked about that 90-plus to one silver-to- gold ratio back in late June. And I know that extreme ratio was part of your reason that you liked silver at the time, as you just mentioned. Now historically, silver does outperform gold when prices are trending higher, but it took a little while for silver to play catch up. What are you expecting from silver given where we are today? Does it continue to outperform, and will we see the ratio fall further, in your view?

Greg Weldon: Yeah, absolutely. From the longer-term view, this is a three to five-year move. You may have seen a year of it already, so you still have a long-term 24-48 month dynamic under way here. Having said that, there is some chance of a pullback here. Our upside targets, $1,505 was the first one in gold and you kind of went through it, and silver $18.65 and that kind of gave us 21 bucks. You're kind of almost halfway between those two levels. So that's kind of interesting. You got kind of a reversal pattern here going on, on a short-term basis.

But what's interesting is to see this happen today (Thursday) as stock markets break out on the back of what is now potentially a risk to the dollar. So we just did a big special piece on this yesterday in Weldon Live, which is our other publication other than the Gold Guru, in which we were talking about the risk to the dollar here because of the movement in rate differentials.

And one of the things that has held the dollar up - two things fundamentally - has been a fear of a dollar debt dynamic, and then demand for dollars to repay debt in some kind of debt deflationary scenario would be high and would circumvent anything the Fed did. And there's evidence to suggest that because the dollar didn't follow the Fed fund futures market, that's for sure. And that correlation had been very tight since 2014 and completely got demolished. But what happened in that vein was yeah, U.S. rates were coming down but not as fast as they were in other places, particularly Europe. So, what you had happen was the yield differential, the bond yield, particularly the 30-year, most highly correlated to the dollar, blew out in terms of the U.S. yield premium because Germany's 30-year was dropping towards zero.

Well, great that the U.S. 30-year went from three and a quarter to two and made [a] record low at the meantime, the German 30-year's, flirting with negative yields. So, what's happened more recently is that there are limits in physics as to how far and how much these bonds can go negative. No matter how much they talk about this, not the next big move. You and I have talked about a little bit probably coming next, it's going to QE rather on steroids... probably first from the ECB, but that's still another maybe one, if not two, steps away as well.

And in the meantime, there is some concern here that in the first phase of a dollar kind of crack if you will, that might boost stock to where money rotates out of metals back into stocks. A very short-term correction could develop here. We're traders, so we're more in tune with that - for investors, who cares? Because the longer-term picture, the two-to-four year picture, is very bullish, and silver will outperform because this is going to be a monetary dynamic that exceeds all the other monetary dynamics.

Look at 1987 and the stock market crash on any chart, monthly chart of the Dow now. Do you, I mean it really, it looks like nothing even happened. That gives you the magnitude where we are now. When you're talking about a 30,000 on the Dow Jones Industrial Average, you know, a one-third correction, that's a lot of money now. It's 10,000 points. So, everything's extrapolated, and it kind of gets back to even our hurricane situation, because there's a lot of this has to do, and we could get really deep here, but we won't... but a lot of this has to do with astrophysics and where our solar system is in the Milky way right now. What tends to happen in physics, you have certain readings, Schumann resonance, and the gas readings. What you have right now is things are increasingly stretched. They're polarized. You see it in everything.

You see it in politics in this country for sure, but you see it in the weather. It's not necessarily that it's global warming, although it is. It's record cold, record heat, record flooding, record drought, record hurricanes, record volcanic activity, record everything. That's only going to continue. And in that vein, as you apply that to the markets, the map around the money that's been created, the debt that's been created when you have to keep this thing going, because to let a debt deflation take over central banks, that's the absolute last thing they want to see.

And we said in the book in 2006 and I say it again here, when facing the abyss of a debt deflation, they will do whatever they have to do to reflate. And what's probably coming next is going to be shock and awe and you're going to want to be long gold, because they are devaluing the purchasing power of all paper and people are finally starting to see that.

Mike Gleason: Switching gears here a little bit, Greg, we saw a former FOMC member, William Dudley, write an op-ed in which he suggests the Fed tried to un-elect President Trump by refusing to provide stimulus and letting the President's trade war pull the U.S. economy into recession. That is a remarkable position for a former central banker to take. And it raises the question about whether the Fed might take an active role in the 2020 election. What do you think? Will the Fed go along with the President and with some of the pressure from the markets and reduced rates in the months ahead, or are they going to allow a recession here for reasons which might include politics?

Greg Weldon: Well, this is such a double-edged machete, because of course the Fed's political, but of course the Fed's not political. So, as an independent body - and let's not forget the Fed was created in 1913 to offset crashes in the stock market. So, it's kind of funny that everyone says, “Oh, this isn't the Fed's job.” Of course this is what they do. It's what they've always done. Alan Greenspan, in 1987, I was there. I was surprised. They continually give us more and more creative ways to do things.

In terms of what William said, it's almost like ding dong, the witch is dead, because what he's done is it's almost like, I mean, it's kind of like he's an ex-postal employee. He's gone in and shot up the place because the Fed wants to remain, at least to have the appearance of being totally independent and totally apolitical. And this guy just threw that out the window. I mean, this is one of those things where if you go into the criminal world, right, and the gangs and whatever they call them, cartels and stuff... I mean, you snitch, you're done. So, I wouldn't be surprised they have hit squads looking for this guy because it so taints the Fed, and no, they're not going to do that.

I don't think they would do that. I don't think Powell seems like he's that ego-driven. This is Donald Trump's ego. It's not Powell's ego. I know some people that work with Trump - not that I'm supporting either side of any of this - but I think people generally agree, even those close to him, that he can be his own worst enemy. Sometimes you just got to shut it. Keep it quiet.

And my suggestion with the Fed is the less you say the better off you are, and he's put himself in a bad position. Why would the Fed then want to feed into that? I don't know. The whole thought process around bringing the economy to a recession, to un-elect Donald Trump. That is a symptom of what's happening in this country, where the hatred for one man, for his personality, his aura, not his policies. Nobody's really able to separate these two things. And they're different because in many ways he's not a likable character. His ego and his persona, he's kind of bombastic and bit of a buffoon sometimes and waving his hands. He doesn't have the greatest vocabulary.

His policies are spot on. So, I think the difficulty in separating those two things is, when you get a situation like this where the hatred for one man is now trumping - yes, pun intended - trumping the love for country. We see it everywhere and it just blows my mind. And frankly, it's symptomatic of the things I've been talking about in more of a scientific angle, because this has an impact on the way human beings act too. And you see it, you see it. It’s increasing random acts of violence and it's increasing random acts of kindness.

And I'll tell you what, we got a ton of random acts of kindness taking place down here in terms of relief for The Bahamas because there was a great connection between South Florida and The Bahamas. So, you see it on both ends of the spectrum. And for William to say something that only damages the Fed's credibility, and it's only bullish for gold because it does so.

Mike Gleason: Yeah. Well put. Well, Greg, as we begin to wind things down in the interview here, I wanted to get your thoughts on platinum, because I had a pretty good move here recently over the last week. What do you have to say about platinum, Greg? Is it finally emerging from its years-long hibernation?

Greg Weldon: Well, absolutely. I think when you started to see platinum at exceeding $500 an ounce discount to gold. Again, kind of getting back to some of the physics, you know as well as I know, stuff created in a supernova platinum is more rare than is gold. And from that perspective, it should command a premium. I understand that it's not that black and white, but to me that makes it interesting when you see it as a $600, $700 discount to gold. And when you see and know that the next wave is more of a monetary thing in a bigger picture, then really kind of a setup for that, which is when the dollar was declining against gold. And when gold was making new highs in so many different currencies, record highs, Australia dollar, Swedish krona... it's that simple, you throw those two currencies out there. And in that vein, platinum absolutely was the laggard because, if this is something that causes the trade war to become bigger, that would hurt platinum at the expense of gold simply as an industrial metal. But how much of that a price then at minus $700?

To me, these were steals in platinum and silver at the levels at which they had reached against gold were extreme, and that has really paid off for us. We actually kept the core holding of gold, but we swapped our big position in gold that we bought at like $1,196 and I forget where we sold it. It was above, $1,400... $1,411 maybe, and pushed everything into platinum and silver, which had barely still moved. And that turned out to be a really good move.

Mike Gleason: Well, Greg, as we close here, any other final comments? I would like to hear kind of where you're thinking we go from here in the precious metals.

Greg Weldon: Yeah. Well, where we go from here I think is you have probably some short-term volatility, maybe some downside, but it's an opportunity if you're not invested to get invested. It's an opportunity if you're not, don't have like what you might consider the full position you want to have to put it on. We're looking at, for example, the GDX has been one of our picks. We have a lot of picks. We have all of this, and today's piece really kind of gives you about what I'm giving you now and even in a broader sense, but when you look at the GDX. It topped out at almost 31 bucks. It's had a pretty decent what will be potentially a key outside/downside reversal week here in a lot of these things.

Not only that, you have upside reversals in the base metals I might mention too copper, tin, zinc, particularly the metals that are in short supply in LME warehouses. But all of this kind of plays into a lower dollar, which is bullish longer term. So, you're looking to buy dips. I'll give you what we're looking for in gold. If you get gold below $1,370, it's a gift. Your first major Fibonacci is $1,407, and you have a low just under there, just under $1,400. It's kind of where we ended up getting out and getting into silver and platinum. So I would think if, frankly, you see a 13-anything print, you're even potentially backing up the truck here to buy gold.

And in terms of silver, it might have a little more of a downside, but I'm telling you, I mean there's solid, solid support at $17.25-17.50, so in any... anything really below $18 and when you get down to $17.50. It may not last real long down there. I think you might have a correction, get some chop, wait and see what the Fed does. And when you come out of this in the next phase when the ECB has to do something. But today we're working on a piece on places like Poland and Hungary that have been very strong because Germany's export juggernaut had been so strong, while Germany's export juggernaut is not only slowed, it's tipping into a recession - terrible data today, terrible data last week. We highlighted all Italy, France, Belgium, all these countries.

But when you look at Poland, Hungary, and the Czech Republic, they had really been the second derivatives of a global economic strength out of Germany... shipping, unfinished goods to be finished in Germany to be shipped out... these economies, the inflation numbers there, the production are really starting to fall. Europe has a problem. And ultimately, when they pull the trigger on what's coming next, I think it'd be very bullish for gold, short-lived, shallow-ish correction. But don't wait too long and don't hesitate if it happens, because I think you know you're going to come out of the shoots again to the upside very quickly in the not-too-distant future.

Mike Gleason: There's a lot of information flying around out there in the financial world, and one thing that I've noticed about you, Greg, is you understand which ones to really look at and pay attention to that drive these markets, and obviously, that's what's helped you make some fantastic calls over the last several months and years. And I always love having you on and getting a chance to talk to you about that stuff.

Hope you have a wonderful weekend. Glad you're going to stay safe from the hurricane there. All our best to those that may be affected by that in the coming days, and thanks Greg, can't wait for our next conversation. Bye for now.

Greg Weldon: Always my pleasure, Mike. Thank you.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.