Rafi Farber: Metals Plunge Predicted Here Last Week Comes True

For the last two silver reports, open interest was way too high for my comfort. And the COTs were showing that bullion banks were record short. That could have been covered the last few days, at least to some degree, but I don’t think it’s over yet. I think we have a few more weeks of this. Again, this shouldn’t really matter for stackers that much because premiums will even out the costs. But for traders, you want to keep being careful here and not necessarily by the dip just yet. I think we have maybe two or three more weeks of this.

But in the bigger picture of things, we have an imminent yield curve on inversion and each recession since 2000, I think even before, I think 1990. Since 1990, each recession has occurred after an un-inversion of the yield curve. We could un-invert in the next few weeks in the 10 year minus two year. And on the money supply, it looks like we are headed back to absolute deflation. We could already be there. I will show you the latest numbers on the money supply and the 13 week averages, which I follow every month. And now this isn’t going to stop.

The deflation is not going to stop until the Fed cuts back down to zero, which it will do probably after we hit the next banking crisis. And the yen is stronger these past two weeks. Is it because the Bank of Japan is doing clandestine swaps with the Fed dollars for yen where the Bank of Japan can sell those dollars that the Fed gives it? No, this is not happening, at least not from the balance sheet of the Fed, which shows that forex reserves have not increased. And despite the beating that gold and silver took this week, the monetary metals are still climbing relative to other commodities.

So it’s not just gold and silver that have been hit. It’s all commodities broadly, not every single commodity, but commodities in a broad sense have been hit, which is a sign of deflationary forces. And we keep getting closer and closer to the next banking crisis, as we can see on the S.O.F.R. security overnight financing rate, the volume of which just keeps going up and up. And the rate is hovering above what it should be comfortably for the Fed. And with that, onto this week’s slides for this week’s silver report brought to you by Fortuna Mining, symbol FSM.

Newest on the docket for Fortuna Mining, symbol FSM, it will release second quarter 2024 financial results on August 7, 2024. Chris will be covering them in a call and I will be covering them in the silver report following the release. We’ll see what they turn up. And back to the 2024 annual guidance just to keep this in mind for the next earnings report. We have close to 500,000 ounces of gold equivalent and estimated all in sustaining costs of between 1485 and 1640 an ounce. Remember, the price of gold now is around 2400, so that profit margin is nice and comfortable.

Projected production increase of 1% to 10%, that’s a pretty wide area, giving us plenty of room to maneuver around that goal. 1% to 10% over 2023 production of about 452,000 gold equivalent ounces. And again, the Segella mine is by far the most efficient at between 1110 and 1230 an ounce. And the least efficient would be the Lindero mine at 1950, but that’s still about a $450 profit margin per ounce. Still pretty comfortable. Fortuna should be well profitable over the next several years. And with that message, let’s continue with this week’s silver report. First thing I want to show you guys is that we look to be near or imminent at a yield curve on inversion.

This is the 10 year treasury minus the two year treasury. I’m not quite sure how important this is right now because the 10 year minus three month treasury is still a little bit farther away from inverting. But we’ll see what happens here. According to this chart, at least after the yield curve on inverts, meaning after 10 year treasuries become higher yielding than two year treasuries. We have just a few months until the next crisis. This is exactly what happened here on the eve of the 2008 financial crisis. We saw the yield curve on invert and head higher, which really just meant that 10 year yields were heading higher than two year yields on a relative basis.

It happened over here in 2000 and happened over here in 1990. It’s probably going to happen again, probably not in the same exact way. You can even argue it happened over here. This is a 2019 very brief inversion over here and then headed higher. And then we had the whole, you know, crisis that we shall never mention here in bad words. But everybody knows what it was. I think China was involved. We just took a little lurch higher in the yield curve spread. And once we cross zero and head higher to a more positive territory, yeah, that would signal the next financial crisis.

And what happens then, of course, is that everything goes down, including gold and silver, then the Fed prints and then gold and silver go crazy and silver the craziest and other commodities less so. But they also go up. And that is when gold and silver gain the most purchasing power during financial crisis, even though in dollar terms, it certainly doesn’t feel that way. That is the reality. We’re headed back into absolute deflation. We could be there already if we look at the weekly money supply numbers that come out every month from the Fed, from the Fred charts.

If we calculate the 13 week average annualized quarterly money supply growth rate, we are back to below 1 percent annual. You can see here that we are about to cross below the 0 percent line. This is the absolute deflation line, meaning on quarterly annualized basis, money supply is heading down and we are heading down again. We briefly broke the deflation plane over here in late 2023. I think it was December 2023 and we’ve been very low above it since. But we’re headed back down into absolute deflation, which means we are headed back into another piece of evidence.

The next financial crisis should come pretty soon. And if you look at the absolute money supply here, going back to 2008, this is the 2008 financial crisis. This tiny little move up in the money supply here is the printing round in 2008. It wasn’t much of anything compared to what happened in 2020, of course. And we see a fairly fluid increase with the seasonal bumps in money supply going up until 2020 and wham the COVID printing. And then we have the peak in money supply. And this is pretty much exactly when they started hiking interest rates, when the Fed started hiking the effective federal funds rate.

And we went vertical on the EFFR on the overnight interest rates. And then right then, money supply stopped growing. Look at that. Who’d have thunk? And it’s been pretty flat ever since. There’s a tiny little growth here, which you can see in the previous chart where we went above the deflation rate. We went above zero. But now we’re going back down again and we should keep going down into August, September and go back into absolute deflation. And because these numbers are on a month delay, we could already be there now. This is the Fed’s forex reserves, meaning if there’s any evidence of them doing swaps with any central bank, those swaps would show up here.

A swap is when the Fed agrees to print dollars in exchange for currency directly from a different central bank. Why Japan would do this is because they need dollars to sell to strengthen the yen, which might be what you could theorize as what they were doing to bring the end back up to I think it’s around 153 now to the dollar. But there’s no evidence that this is happening because there’s not much movement in the forex reserves at the Fed. This would include yen if it’s going on its balance sheet, but it doesn’t seem that that is the case.

So therefore, what is happening is the BOJ, the Bank of Japan, is selling its own dollar cash and running out of ammunition. They will run out at some point soon. Estimates on this kind of move is something between 40 and 60 billion dollars spent. I don’t know how much they have left, but it’s a lot less than before. I’m going to go into here the COT evidence for gold declining these past few weeks, which I warned about in the previous two silver reports. I was uncomfortable about the commitment of traders reports here, especially the number of shorts held by the bullion banks.

It was at a record high, meaning a record negative number here. This is the negative number means a net short position. It was about 250,000 contracts short, which has never been held before. And you can see in these triangles, sorry, these rectangles of love as I call them. I don’t know why I call them that. I just I don’t know. I can’t think of a good name for them. So rectangles of love is as good as any you see here that we had a record position in 2022. It looks like. Yeah, this was March 7th, 2022 during the nickel Armageddon fiasco.

And that was a long term mini medium term top and gold here. We have the same record short position over here at that time. A record short position in 2020 just prior to the unnameable crisis that we shall not talk about. And this little bump over here, this little inversion, so V, that was the March 2020 covid crash that freaked everybody out and brought gold down to 1450 and silver down to like 1150 or 1110 or something like that. And it hit a lot of people out of the game who were leveraged. And you don’t want to go through that.

But, you know, on this long term chart doesn’t look like anything, but it was pretty big at the time. Back here, the previous record in bullion bank short positions at that point was during the 2016 high after the initial move out of the four year gold bear market. Again, it was a record short position in bullion banks. And we had the same over here in 2015, another little local high over here. So judging from history and looking at the record short positions in bullion banks, it wasn’t very safe over here. And we’ve got to lower these numbers before we can go on another trip higher.

And they will come down. It’s going to take a few more weeks, but they will even out in the open interest, which is related. We can see that yesterday, Thursday, July 25th, 28,638 contracts were closed, bringing open interest down. And that means short positions, net short positions by the bullion banks down about 30,000 contracts. These numbers over here on a week delay or two week delay, something like that. So we’ll see where they come up to. And I expect the bullion banks to close their shorts as the managed money closes their longs as they’re chased out in this price correction.

This is the number down here of August gold contracts, the active contract that’s going to be rolled over into December, I think. Or that is being rolled over 45,000 closed out for a net closing of close to 30,000 contracts. So looking good. This has to keep going and we’ll see where it ends up. But stay cautious here. I forgot the title of this one. But anyway, this is the gold to commodities ratio. I’ve shown this before. I just wanted to give you an even longer view of what is going on. And we see here that gold keeps climbing relative to other commodities.

So it’s real purchasing power versus raw commodities is now at 3.325, which is much higher than the 1980 high. And people have asked me, well, what does this matter? It doesn’t really affect consumer prices that much. But indeed it does, except it’s on a it’s on a longer lag because we’re talking about raw commodities, which takes a long time for that to filter into the consumer goods sector. And I made a point in my latest sub stack that, in my opinion, even if gold is manipulated, which I believe it is, to some extent, I don’t think that those that are manipulating it are doing a very good job because if they were very good at manipulating gold and silver or did it very effectively, then this chart would be going down and not up.

Everyone can have their opinions. I could be having tunnel vision on this issue. I’m not married to it. This is just what I think. And you’re free to disagree. Point being that if they’re manipulating gold down more than other commodities, this would be going down and not up. But it’s not. It’s going up and not down. Another thing I want to show you about this chart is that the two biggest moves we’ve seen in gold versus other commodities were during the 2008 financial crisis. Right here, where it went from one point five to three, a doubling in a few months, which was pretty similar to what it did in the late 1970s to 1980.

That was about a tripling, even more than a tripling. So it wasn’t as big as the 1980 move. It was pretty significant. The other major move was during this financial crisis in 2020, where we hit a high of about five point two five or whatever that is. And this bear market from the peak of the lockdown crisis until about 2022 was a much worse bear market than the 2011 to 2015 bear market, which was it was around here, which was bad. But nowhere near as bad as this one. But in dollar terms, it was worse. So just keep in mind this chart for a bigger perspective, I’d say, or a more balanced perspective as to what is happening in gold versus the commodity space, which is, I think, much more important than gold in gold.

Dollar terms. The last chart I wanted to show you is that we keep moving higher and higher and higher, including this week where I made a new record high in secure overnight financing rate. This is the repo volume, how much dollars are being transacted every night between banks. It goes up and up and up because funding necessities for big banks keep going higher and higher and higher. And remember, this these dollars are not being taken from nowhere. They’re being taken from bank reserves. And the more bank reserves they take, the less bank reserves are available for other things.

And once they run out, this rate is going to spike up just like it did in 2019 over here. And we’re going to trigger another banking crisis. It’s going to come from here. I don’t know if it’s going to start here or this is going to be somewhere in the middle of the crisis, but it is coming. And this volume is not going to go down because as the monetary base shrinks and the Fed continues its quantitative tightening, banks will need more and more of these dollars to fund their overnight needs. And so in a broad sense, the point I’m trying to make is that, yeah, gold and silver are going to go up and down and up and down.

And they’re going to trend higher until we get to the next financial crisis, which just like 2008 and just like 2020 changed the entire picture and brought us to a new. Range, except this time, I don’t think it’s going to be a new range. This time, I think it’s going to be the collapse of the banking system once the next round of printing starts. We see it in the yield curve. We see it in the secured overnight financing rate in the repo rate. You might be seeing in the stocks now with the NASDAQ taking a nose over the last few weeks.

But no matter which chart you read, we know the dollar base is shrinking. Quantitative tightening continues. Overnight funding needs increase. And that is a recipe for a financial disaster. This is Rafi of The Endgame Investor with this week’s silver report for Acadia Economics. And I’ll see you guys again next week. Thank you. [tr:trw].

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