Rafi Farber: Gold to All-Time Highs As Mideast War On Knifes Edge
Summary
➡ The article discusses the current financial situation, focusing on the issuance of treasury bills and the yield curve. It explains that there hasn’t been enough treasury bills issued to drain money out of the reverse repos. The article also discusses the yield curve, stating that it’s not broken and still predicts recessions. Lastly, it mentions the rising stress in the stock market and anticipates a financial crisis, advising caution when trading gold and silver dollars.
Transcript
I think the same thing’s going to happen again. We’ll see. Maybe I’m just hopeful. I am hopeful. But I think I’m also right. I guess if I’m online next week, then everything should be fine. Whatever attack happens is probably going to happen in the next few days, but whatever, you know? Anyway, what are we going to talk about this week? Well, silver is lagging. Gold is pulling away, which kind of tells me that we might still want to be a little bit cautious here in dollar terms, though the bull market and gold especially is pulling away from other commodities.
The gold to commodities ratio is rising fast now, and it looks like the gold to stocks ratio is finally starting to break through its downtrend line since 2011, but hasn’t quite broken through its downtrend line since 2012. I’ll show you those charts. Update on reverse repos. There are about 350 billion of those left. Those have to be emptied out before we run out of extra dollars in the monetary tank, and I’ll give you an estimation of when I think that will happen. According to Bank of America estimates, sometime in the next two months, we’ll see.
The repo rate, the overnight loan rate between banks should be peaking today as we get the numbers for August 1st. If it jumps through 5.4 percent, it could spell some trouble leading up. And we have a ratio of about 70 percent of bank reserves now being used for repos as repo volume has jumped to another new record high of about 2.2 trillion dollars. A little bit on why the yen is rising even though the Bank of Japan hiked rates and the yen in my thesis should go down with bonds go down because they’re tied together.
Even though the Bank of Japan hiked rates, the 10 year yield on Japanese government bonds actually cratered. And why is that? They’re probably anticipating a recession and a new money printing round as is going to happen all across the world at the same time when it is triggered. And before we begin with slides, this week’s silver report is brought to you by Fortuna Mining, where all shareholders are fortunate. That’s just a pun. It’s not advice. But there’s something interesting to show you today about Fortuna. Well, earnings come out next week. I just wanted to show you something that is going on inside the mines of the company.
So you can understand a little bit more about mining. This I did not think of. So it’s interesting to keep in mind these little variables when you invest in a mining company. So here we read that it processing at the Segella mine, right, I’m starting to read here, process tons were constrained throughout the quarter due to power shedding from the national grid supplier due to failures at two power plants in Ivory Coast. These outages are expected to be rectified and normal power is expected to resume by the end of July. It is now past the end of July.
It is now August 2nd. So these numbers in production at the Segella mine should go up assuming that issue has been rectified. Indeed, in the interim, the company is sourcing backup diesel power generation capabilities. This will provide power should the current outages extend beyond the expected resumption of normal energy supply or in the event of future outages. And finally, Segella’s 2024 production guidance of 126,000, 138,000 ounces of gold remains unaffected. So we see here responsible company dealing with the hiccups that are involved in mining, including in rickety countries like Ivory Coast that could have power grid issues, which indeed has happened at Segella, but has not affected the company in any significant way.
Good job on managing that little speed bump. And we will continue with this week’s silver report brought to you by Fortuna Mining Symbol FSM. As a slide one here, we’re going to go through these quickly. I’ll try. Gold continues to pull away from other commodities. Well, people are focused on the dollar amount and the new alt on high path 2500. Yes, this is true, but it’s not really what I think is so significant. I think this is much more significant. The fact that gold to CRB ratio CRB is the Reuters Jeffery’s CRB commodity index is now past nine.
And you can see here that this matches the resistance zone hit in a summer on September and 2019 before we hit an all time high of past 15. I think that’s 15.7 something at the peak of the lockdowns of 2020. I think this was April 20th for 20, as I remember the date when oil went to negative 35. The point here is that gold is continually outperforming other commodities, which means that the monetary nature of the commodity itself is starting to show again. And it’s not so simple in terms of dollars, because as you might recall, in this record breaking rally in gold versus other commodities, we had that huge sell off in dollar terms from about 1800 something to 1450.
It was very scary for gold and even scarier for silver, but nonetheless, it was still rising precipitously versus other commodities, some of which were going into negative territory at the time. So while this commodity gold in terms of commodity rally extends and continues stronger and stronger in terms of dollars, we might get a little bumpy here as we encounter what looks to be another dollar crunch. You can see that happening in tech stocks and other little bubble stocks that we see being mentioned on mainstream news sites all the time. But let’s continue.
So this is silver. Silver is also outperforming commodities, especially since 2022, September 2022, but it’s still lagging gold here. It’s not really pulling away. It’s kind of coiling around the 200 week moving average here. So given that silver is lagging gold right here, I’d say that the gold rally might be in commodity terms, but in dollar terms, it’s going to get a little bumpy in the short term in the next few weeks. So I’d be careful here, especially for trading. And you can see here on that record, gold rally in terms of commodities.
Silver was zigzagging like crazy. It was very hard to hold on if you were trading ETS or something like that. If it was physical, obviously it’s much easier, but that’s a different strategy. Gold to stocks ratio breaks 2011 downtrend line. Look at this. So here is the high in gold to the S&P 500 back in August 2011. And we hit that trend line here in March, April 2020. It looks like we’ve broken through that downtrend line. And now we are skating above it. It looks like here we have a head and shoulders bottom here and a major bottom in 2022.
So as the gold to stocks ratio arises, again, people are going to be logging into their brokerage accounts, realizing that their stocks are not maintaining the value that they thought they were. And then people are going to start getting more nervous and moving into gold and silver. Still though, the trend line from 2012 has not been broken yet. It looks like we’re still pinned below it if you want to count from here. Again, these trend line, these aren’t exact science. This is not an exact science. It’s more of an art. So it depends where you want to count it from.
If you count it from here, which is the really the beginning of the gold bear market in terms of stocks when it really started to decline seriously, it looks like we’re still pinned below it. And we’ll see if we can break through it in this rally over here. Looks like the trend line is somewhere around 0.45, 0.47, something like that. And we’re right now at 0.46. Now people have been asking about reverse repos because I thought they were a big deal several months ago. I still think they are, but nothing has happened with them lately in 2024.
So I just stopped talking about them because there’s something to talk about. But I researched the issue on the proddings of some end game investor subscribers. So thank you for getting me back into this issue here. If you want to become a paid subscriber, that would be great. We have less than $350 billion left in reverse repos. That’s the same number that we had throughout much of 2024. It’s not a record low. The record low was post-tax day 2024. But you can see here that the reverse repos, the extra dollars in the tank have not emptied since then.
Why is that? Because there hasn’t been any net issuance of treasury bills. When banks want to take money out of the reverse repo facility, they need someone similar to put it in terms of duration and yield. And the only real option for them is treasury bills. And so we see here two things. On the right first, this is from CIFMA. I forgot what it stands for, but they track issuance of treasuries by tenor. And here you have the net issuance of treasury bills in 2024. So if you add all these numbers together, some of them are negative because there was negative issuance for April and June, meaning more were deemed than issued.
So that’s 90 billion. If you take all this together, 90 billion in net treasury issuance since all of 2024 from January to June. So that’s not enough money to drain out of the reverse repos if only 90 billion have been issued on net. And so we see here on the left, this is Bank of America’s estimate for the total net bill supply for 2024. And here they write $794 billion. So far, it’s only been 90. So if you take 794, you subtract 90 for what’s already been issued on net, you have 704 billion by the end of 2024.
At that rate, if it’s an even rate, then in the next two months, we should see that $350 billion drained and reverse repos finally zero out. I don’t know if Bank of America is correct. This is just according to their numbers. We’ll see what happens. And I wanted to talk about for a second the 10 year minus two year yield curve. We’ve been seeing a lot of articles lately that the yield curve is broken and it’s not that it’s not predicting recessions anymore. It doesn’t work. That’s not true. Because if you look at this chart over here from Fred, we can see the yield curve inversion every time it goes below zero.
That means that two year yields are above 10 year yields. And what happens here since 1990 or before 1988, 1989, every time the yield curve inverts, there is not a recession until it on inverts. You see here the shaded areas are recessions. And when the yield curve on inverts, then you have the recession. Same thing here in 2000, there was an inversion in 2000. The recession did not start until 2001. We’re talking about a Keynesian recession. This is just when malinvestments are revealed, the problems of the boom economy are revealed. People didn’t reveal their boom problems, you could say, until 2001.
And same thing here in 2006, 2007 yield curve inversion here. And then there was a major un-inversion as we went back above zero. And only then was there a recession. And same thing here. We had a very minor inversion here. You can’t see it on the zoomed out chart, but if you zoom in, it is an inversion. And once we had going back to above zero and un-inversion, then you had the recession over here. The one could argue this is the one is a little bit artificial because of the lockdowns, but I’m not going to get into that right now.
So the point is here, we’ve had an inversion of the yield curve since 2022, I think this is, and it continues to this day. Now we’re still below zero, but we’re headed towards the zero mark and we’re going to break through it. We see that because we’re seeing moves in interest rates. Now, 10 year yields are really starting to fall. I think that is the prelude to a Keynesian style recession, which will lead to the final money printing round, which we’re all waiting for. So the yield curve indicator is not broken because we have not broken back above zero yet, which is when typically the recessions actually happen.
We’re going to go to the next issue right now, and that is the repo rate. The repo rate as of yesterday. So we have the repo rate is now 5.38 and the peak should be tomorrow, should be today, August 2nd, where we get data for August 1st, which is when the rate typically peaks. Now, if we have a rate above this, above the July 1st and January 2nd, which was the first business day of 2024 above 5.4, then we’re going to see, then that means there’s some real stress in the repo market.
And why is that stress coming? Because reserves are falling hard. Again, reserves, bank reserves, the ghost of dead debt, as I now call them, are down $100 billion since last week. We’re at 3.178 trillion. I believe the crisis line is somewhere around 3 trillion. We’ve been around here before. We could jump around, but I’m hoping that the reserves keep falling from here. And what does that mean? So the bank reserves are what’s used to lend repos from bank to bank. The banks with excess reserves loan to the banks without any excess reserves and the small banks get squeezed and squeezed for all that interest.
Isn’t that great? So the ratio of repos to reserves right now is back up to 69%. The crisis area over here is somewhere around 83, 80, 45. So we’re getting closer as repo volumes grow and grow and grow in reserves, shrink and shrink, only one direction it’s going to go in and it’s going to be a collision and it’s coming. It’s coming soon. Exactly. We see the stress in the stock market. We’re seeing stress all over the place. Why are the yen is rising? We heard that the Bank of Japan raised yields, hiked rates by 25 basis points.
So according to my thesis, the higher that Japanese government bond yields go, the weaker the yen becomes because the yen is the other side of Japanese government bonds because the Japanese bank, the Bank of Japan owns so many bonds. So it’s the same thing. So as, as bonds weaken social, the currency. So why, if that’s true, why, if bonds just weakened, why is the yen rising? Shouldn’t be, but you see here that it’s only the, they only hiked rates on the short end, right? The 10 year yield was way down when that hiking happened.
Why, why is that? Well, because I guess Japanese investors do not believe that the Japanese economy can handle hikes are very long. So they’re fronting up, they’re buying 10 year Japanese government bonds, forcing the yield lower in anticipation for major cuts that are going to happen after these small tiny little hikes are going to cause a major crash, which is already happening in Japanese stocks. So as you see here, as the yield goes down, the yen to dollar rate goes down, which means the end is strengthening. This correlation has not broken.
It’s still accurate and I’ve, I’m still proven right here. So yeah, we’re getting closer and closer to the final Keynesian style recession, crash, financial crisis. It’s all the same terminology. We’re seeing stress, major stress in the tech stocks. We’re seeing interest rates start to dive on the long end, both in Japan and the United States. We’re headed into the final dollar crunch. It’s going to be a little bit difficult on the dollar side of the golden silver market. I mean, golden silver in terms of dollars, but we can see that the bull markets are continuing strong for golden silver versus commodities and golden silver versus stocks.
Stay careful out there in terms of trading golden silver dollars. I’m not doing it right now and keep stacking. If you’re stacking, if you want more stacks, it’s always a good time to do that. If you’ve got extra cash, that’s not advice. And as always, I’ll see you guys next week. Hopefully, if I don’t have to evacuate, I know I keep saying that, but it’s getting kind of hairy here, at least in the media, which I probably shouldn’t be watching. And hopefully, things will be quiet by next week. I’ll see you guys soon.
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