Precious Metals Will Rise As the Economic Recovery Disintegrates

Home Sales Economic Recovery

What we are witnessing here is the disintegration of the so-called economic recovery.  A great deal of effort by the FED to print, pump and prime the market seems to be losing steam.  The tide has now changed as the broader stock markets decline, the precious metals have decoupled moving higher making significant gains.

The once great U.S. Economy is nothing more than a Grand Paper Facade.  The housing market is not being kept alive by Mom & Pop home buyers, but rather from a mixture of wealthy individuals, Hedge Funds and Wall Street who are buying up real estate with cash.  Real Estate Speculators are the most fickle of the bunch.

If we look at the chart below, we can see that the majority of home purchases have been using cash:

Cash House Purchases

According to Dr. Housing Bubble:

I think the myth of cash buyers being a small part of the market fed into the meme that the housing market was “organically” going up on the underlying power of the economy.  In reality, the market has been bubbling up because hot money is voraciously fighting over itself to eat up whatever inventory is available.

The above chart clearly shows that investor money is really driving the bulk of the housing market.  The low rates promoted by the Fed were cast under the umbrella of helping out regular families but in reality, they have turned into the next hot money play for banks, hedge funds, and Wall Street.  The fact that 60 percent of all purchases in 2013 are being driven by the cash crowd is crazy (a 200 percent increase from the 20 percent pre-crash levels).

Furthermore, it looks like the housing market is starting to turn south as new home sales missed big time:

New Home Sales chart Zerohedge

And lastly, we know we are getting into serious bubble territory when the largest Wall Street Firms are unloading some of their real estate exposure by the selling of RENTAL BACKED SECURITIES.

From ZeroHedge:

The last time there was a great divergence (to the benefit of housing), Wall Street spawned an entire Residential Mortgage-Backed Securities industry where Paulson, Goldman willing sellers would package mortgages, often-times synthetically, slice them up in tranches of assorted riskiness, and sell them to willing idiots yield-starved buyers. As everyone knows, that particular securitization bubble ended with the bankruptcy of Lehman, the bailout of AIG and the near collapse of the financial system. As it turns out, the answer to our original question was “a few hours” because securitizations are back, baby, and this time they are scarier and riskier than ever.

Blackstone – America’s largest landlord – is now actively selling its housing exposure, whether with the assistance of Goldman’s Fab Tourre, Paulson’s Paolo Pellegrini, or… Deutsche Bank’s own Greg Lippmann.

So, now that it looks like we have reached the TOP of the housing-rental market, the big players are getting out by packaging garbage and selling it to poor unworthy slobs.  Not only are these big players selling at the top, they will more than likely be shorting these RBS- Rental Backed Securities all way down to the bottom.

Funny how markets never seem to learn from past mistakes.

The Great Precious Metal Divergence

A few months ago, I wrote about the great Dow Jones Divergence after QE3 when the broader stock markets rose to new highs, while the precious metals were taken out to the woodshed and beaten senselessly.

Well, it looks as if the trend has changed as gold and silver have seemingly decoupled from the broader stock markets:

The Precious Metal Divergence

Since Aug. 6th, the price of gold and silver have moved up higher while the Dow Jones lost 700 points (chart above from 8/27).  As we can see the SLV is outperforming the GLD.  This is normally the case when we see the beginning stages of a new precious metal up-leg.

While the precious metals have fallen in Thursday trading, nothing goes up in a straight line.  Furthermore, the action in the markets reconfirms this inverse precious metal-Dow Jones correlation.

There still seems to be many precious metal investors concerned with the so-called “Supply & Demand Forces” in silver.  Some may think that a slowing economy is bad for silver industrial demand.  While that may have been true in the past, we are heading into a future in which orthodox forecasts become increasingly worthless.  This will be a time when typical supply and demand analysis will be thrown out the window.

Gold and Silver are now in the beginning stages of reclaiming their “Monetary Status.”  This can be easily seen by the two side-by-side charts below:

Which is Gold & SIlver Chart

Without going to StockCharts.com and comparing charts, which chart belongs to gold and which to silver?  Almost identical… aye?  These are sections of gold & silver divided by the Dow Jones Average.  The low point on both charts was in Nov. 2012 when the ratio of the DOW to gold & silver bottomed (Dow-Gold = 7/1, Dow-Silver = 375/1).

The top was reached in July 2013 when the Dow-Gold ratio hit 12.5/1 and the Dow-Silver ratio was a staggering 800/1.  Today, the ratios have fallen considerably as it only takes 10.5 ounces of gold to buy the Dow and 610 ounces of silver.

As for the answer…. the gold chart is on the left and silver on the right.

The U.S. Economy’s Best Days are Behind it

There is still a great deal of optimism coming from MSM as well as some of the precious metal analysts that the U.S. can return to the heydays of the past and become a strong manufacturing economy once again.

I am really surprised that a few of the well-known gold bugs believe that once the U.S. Dollar is backed by gold or etc, we will see one of the greatest economic expansions in U.S. history.  I hate to break the bad news… but those days are over for good.

U.S. energy consumption peaked in 2007, and has been falling ever since.

Total U.S. Energy Consumption by Industry

There are several trends that can been seen from the chart above.  First, energy consumption in the transportation, residential and commercial sectors peaked during 2007-2008.  Second,  energy consumption in the great U.S. manufacturing sector first peaked in 1979 (shown by industrial consumption line) and then again in 1997.  Third, the second peak in industrial energy consumption (1997) was the final nail in the coffin for the U.S. manufacturing industry as it was sent overseas to make way for the bubble service economy.

The reason why we cannot return to a manufacturing industry as we had in the past is due to the fact that we don’t have the cheap and available energy to do so.  Of course we can transition back to a more local and smaller mode of manufacturing in the states, but it will be a fraction of its former self.

The U.S. economy has been nothing more than a series of bubbles ever since it transitioned out of manufacturing and into a service economy.  We now are at the very last and largest bubble in history — the U.S. Treasury Bubble.

There is no way of telling exactly when the U.S. Treasury Bubble will burst, however fundamentals are now pointing back in favor of the precious metals.  Currently we are seeing a decoupling as the prices of gold and silver are heading in the opposite direction of the broader stock markets.

Lastly, it looks as if the bullion banks are now situated to be on the “Bullish Side” of the big move up in the precious metals.  With war on the horizon in Syria and the continued disintegration of the U.S. economy… things are about to get very interesting in the gold and silver markets.

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14 Comments on "Precious Metals Will Rise As the Economic Recovery Disintegrates"

  1. Fundamentally the basics.

    Food, shelter and clothing.
    Food costs keep rising.
    Housing? Not good. See Steve’s article above!
    Closely connected to shelter is the cost of energy. Going up.
    Clothing costs keep inching upwards. Just ask the Mom’s who are back to school shopping!

    50% of Americans believe their household’s financial condition will remain the same.
    50% of Americans rate the job market in their region as bad.

    Percentage of Americans living pay check to pay check:
    In 2007, 43% fell into this catagory.
    In 2008, the number increased to 49%.
    In 2009, the number skyrocketed up to 61%.
    In the most recent survey, the number exploded to 77%.

    Recovery? What recovery? Maybe on Wall Street for the 1% er’s. Not on Main Street.

    http://www.harrisinteractive.com/NewsRoom/HarrisPolls.aspx

    • OutLookingin… looks like the American Consumers best days are now in the rear view mirror. Furthermore, as you can see from the energy consumption chart at the end of the article, we have been using less and less energy each year. So how in the living HELL are we keeping our GDP positive?

      1) FED PRINTING
      2) FED TREASURY & MBS PURCHASES
      3) UNDER REPORTING INFLATION
      4) ADDING MORE DEBT

      That’s how you show a positive GDP when in fact it is negative.

      steve

  2. Another fundamental, only globally.

    The Baltic Dry Index (stock symbol BDI) which tracks the cost of shipping dry bulk goods worldwide, such as iron ore etc. and is a good barometer of the health of the global economy.

    The BDI on the weekly chart has failed to gain the 1200 level (currently at 1146) for the fourth time, since last at that level during the first week of February 2011. The 200 day moving average on the weekly chart continues its inexorable decline, since turning lower over five years ago!

    Some pundits will point to over supply in the shipping industry as the cause. Or the number of new units about to come online that were ordered years ago. Close examination of these factors, prove their conclusions to be false. Those units that were ordered in good times, with delivery dates of up to 4 years, have since been put into service. The older inefficient ships have long since been sent to the breaking yards for metal salvage, since the higher cost of bunker crude have rendered them obsolete.

    • OutLookingin… yeah, something else about the Baltic Dry Index. I would imagine the GRAND COLLAPSE of the Real Estate, Govt Sponsored Entities and Banks back in 2007-2008 signaled the DEATH of the global economy.

      The only countries that are growing are mainly those from the East while the U.S. and Europe continue to disintegrate. Their Energy Consumption trend speaks volumes.

      steve

  3. what difference thirty years can make!
    thirty years ago, average ppl in china makes about 100 dollars a year!

    now, they’re buying up luxury real estate across america!

    • judejin… while its impressive that the Chinese are now able to share the wealth of the world, I rather them buy gold, silver and other hard assets rather than Real Estate in the USA that will become increasingly worthless.

      steve

      • i’m not saying they’re right. i prefer gold/silver too.

        i believe real estate will drop 99% in terms of silver in the end!

        on average, a house that costs 1 ton of silver today, will be worth 10 kilo of silver in the future. i’m being conservative!

  4. Steve,

    If you could elaborate on this comment I took from your article I would appreciate it. I see big things for silver prices in the future, but I would like to know how falling industrial demand will not affect silver prices, in your opinion as it has in the past.

    I know, that you, silver is used in most electronics and many other applications in industry, this is the only point I diverge from your article, but maybe you can shed some insight on these “new forces” at work, outside of solely investment demand, if that is what you were referring to.

    Here is your quote “Some may think that a slowing economy is bad for silver industrial demand. While that may have been true in the past, we are heading into a future in which orthodox forecasts become increasingly worthless. This will be a time when typical supply and demand analysis will be thrown out the window.”

    • Aaron... where we are heading is like nothing we have been through before. There have always been higher EROI energy sources that we could tap into that would allow our advanced societies to continue. However, we are now at a cross-roads as we have designed a system of daily life that has no future.

      From the 1990’s to 2003, the world had a annual deficit of silver. During this time, the price of silver remained in a trading range of $4-5 an ounce. The price of silver moved up considerably starting in 2005… and all that was due to investment demand.

      Even as the world hit a record so-called SURPLUS in 2011, we hit a new average yearly high of silver at $35.12:

      As you can see from the chart above, even though we had strong industrial demand along with so-called annual deficits, the price of silver remained at a low price. So, it proves that industrial demand was not responsible for moving the price from $5 to $35… it was INVESTMENT demand.

      We have only just begun to see investment demand. The cartel has beaten down both gold and silver, but at some point in time, it will no longer be able to keep the fundamentals from kicking in.

      Regardless, supply and demand forces will become totally meaningless when the fiat monetary system dries up and blows away.

      steve

  5. Aaron, falling industrial demand + nevertheless persistently high diesel prices + declining ore grades + rigged prices driving miners out of business = decreased output.

    Falling industrial demand also means less mining of the base metals for which sliver is a by-product, also would cause decreased output.

    Industry might be slowing down in aggregate, but my understanding is that solar PV is growing rapidly, as in exponential growth trajectory. Setting up Skynet needs silver. And even with slower or crashing industry, so what? There’s about a billion uses for this metal even in the depression. Like food preservation. Meanwhile, investment demand has been frickin nothing. Feel free to check my number, but the world only spent some piddly 8 Billion or so $ on silver in 2012. A few billionaires could fart and blow 100 x that amount of currency into the market for investment demand, which might be just about to happen.

  6. Lets just hope that Jim Sinclair keeps his mouth shut for a while. Every time he starts running his trap about how we have made a bottom, the lows are in the rear view mirror, you won’t see gold at this price ever again, it gets the snot kicked out of it.

  7. The problem that will face investors going forward is the realization that most assets that derive that value from a growing energy supply will become increasingly worthless. Thus, there will be a move to protect wealth the physical assets and their stocks.

    This is why I believe silver-gold and the mining stocks will do wonderfully in the future.

    steve

  8. Does this include the shadow inventory? There’s more homes than diamonds, for sale in this country…

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