Market Insights From Excelsior – Sun 7 Feb, 2021

The Great Sector Rotation Out Of Bonds And Into Gold

I am re-posting this article that Shad (AKA Excelsior) shared under Craig Hemke’s interview on Thursday. I hope you all enjoy this dedicated post for Shad.

If any of you have your thoughts on the markets that you would like to to share please email me your article to Fleck@kereport.com.


It is easy for investors to get swept up into the daily fluctuations for any asset class or stock, and to be on the edge of one’s seat trying to determine what will happen right around the corner. We all wonder what will happen tomorrow, next week, next month… Sometimes it is helpful to zoom out from all the daily noise, and look at the larger macro forces at work.

With regards to what the drivers for the Precious Metals will be, there are always short-term events (black swans, Fed statements, Brexit, trouble in EU, stimulus bills, news on repo market swaps, etc…) that come and go, but the longer term thesis (boring as it is for so many now) is still quite relevant.

There really IS way too much national debt on the backs of countries all over the globe. Central bank meddling and increasing the money supply through easing measures, combined with super low – to zero – to even negative real rates, is a great environment for the Precious Metals. Gold is increasingly being remembered as the “uncurrency” and uncorrelated store of value that it is, and this will become even more apparent as the Humpty Dumpty general markets fall off the wall, and all the Feds horses, and all the King’s financial advisors can’t put Humpty Dumpty back together again.

It is interesting to note that when most market pundit “experts” discuss the demand divers for gold, they often focused on as jewelry demand out of the East, industrial fabrication, and then the debate around the edges is where the investment demand will come from. These are all real fundamental factors that absorb the physical markets, but ultimately they are not the source of what is driving the gold prices.

The Gold prices are driven by the futures markets, and they are massive and forward-looking. This means pricing is almost entirely investment-related, and has little to do with what the little guy on the street is buying from his local coin shop, and much more to do with larger money flows in the paper markets of futures contracts, or at a minimum the ETF inflows on “paper gold.” It would be nice if the actual physical markets were what drove price for real supply and demand fundamentals, but that isn’t what we’ve seen for many many years. One can fight that reality, and get upset about it philosophically, or just embrace the price action as it comes, and follow the macro trends.

The ebbs and flows of the larger paper markets in the futures contracts or GLD pricing, has little to do with jewelry and industrial fabrication, and more to do with larger big money reactions to national and international monetary policies and as tool to store value without national or individual company counter-party risk.

For a long time, as the haters and bears came out to bash Gold as a pet rock, their basic attack was that it was a boring, lifeless asset, that didn’t do anything, didn’t pay dividends or interest, and was an archaic relic of the past that no longer was money.

> The simple question to ask then is: Well if Gold isn’t Money, then why the hell are Central Banks continuing to buy Gold and store it in their vaults then?

This point, while very obvious, it getting stale in investors constant need for even more reasons why the Precious Metals will continue to see more demand. For the time being, let’s take the jewelry demand, industrial fabrication demand, smaller retail demand, and even central bank demand out of the equation for just a moment, and look at the crest of an investment wave that is just now coming into shore.

>> There is actually a huge 800 Pound Gorilla in the room that very few of the macro “experts” are discussing or have even considered.

The new money flows into gold won’t necessarily need to be physical buyers of jewelry in the East, small retail investors in the West, or even a large increase in purchases from central bankers, because it will actually be a huge “rotation trade” out of Bonds and into Gold. This may sound like a shocking claim, but follow the yellow brick road.

On a larger institutional level, the real rotation into Gold hasn’t even really begun yet, and most funds have zero allocation or possibly a 1-2% allocation. As that allocation grows in Gold, it will represent massive demand and this will soak up far more precious metals than a short-lived Reddit rally or even longer-term enthusiastic retail buyers. This should be a very encouraging thought to all precious metals investors.

The Bond Bubble will pop, and the everything rally in the general markets, already at nosebleed valuations, will be coming to an end, sooner rather than later. Yes, even though it has been a market boogey man for the last 12 years, a more significant correction really will hit the general markets in the next year or two.

Yes, nations around the globe will introduce more and more stimulus (as austerity measures in many countries were a train-wreck and failed experiment). The financial power brokers will pour on the MMT (Modern Monetary Theory = More Money Today) policies to reflate their way out of the mess. As anyone that has studies economics realizes, this will eventually end in currency debasement and true inflation.  These stimulus funds are actually getting to consumers and small businesses and this will finally increase money velocity of supply and circulation. This is the only playbook the central banks really have, to inflate their way out of the deflation. Off in the distance I hear the central banks and national fiscal handlers chanting, “To infinity and beyond!”

When the music stops, and larger funds start scrambling for the remaining chairs, a large defensive sector rotation will shift into to high gear looking for a place to shelter their assets from the coming storm. It will happen gradually at first, and then as things devolve in the general markets, all of the sudden.

Sure, in the short term, interest rates have been rising, and while it may seem like a lot on a percentage basis to go from 0.55% to 1.15%, these higher yields are dismal in comparison to past returns. Those celebrating the uptick in rates recently are not going to get the last hoorah though, as the central banks are definitely leaning towards controlling the curve and can’t let rates go that much higher. The 10 Year note has been up at 1.15% recently, (which is nothing that zesty), and maybe the FED let’s it get to 2%, but there is no way they are going to let rates normalize up to 4%-7% again, as it would implode their whole system. This narrow range is the new normal.

As for stimulating the economy and markets by lowering rates, there isn’t much bandwidth that they have to work with. Last summer rates were already down at bare bones minimums near zero, or even negative in Europe and Japan. That is the other bookend of the narrow range that rates are going to be stuck in for the foreseeable future. Real rates are still negative in any scenario, as inflation will outstrip the nominal rates, and so Precious Metals and maybe the Cryptos will be recipients of money flows trying to get outside of the financial tomfoolery we’ve seen on display since the 2008-2009 Great Financial Crisis.

In her recent article on Seeking Alpha called “The Hindsight Depression,” macro investor, Lyn Alden Schwartzer recently quipped:

“By 2020, private debt had gone flat for a while as a percentage of GDP (household debt was down while corporate debt was up), but federal debt began skyrocketing from an already high 106% of GDP baseline due to the pandemic and subsequent economic shutdown. Federal deficits reaching 15-20% of GDP in 2020 approached World War II levels for the first time in modern history, resulting in federal debt levels rapidly moving to 125-130% of GDP and likely higher in the years ahead. The Federal Reserve began discussing yield curve control as an option, and bought a massive amount of Treasuries in mid-March when foreigners and hedge funds sold hundreds of billion in Treasuries, and the Fed continues to buy a significant percentage of Treasury issuance out of necessity. Unlike the 2010s, the broad money supply went up extremely quickly in 2020, because banks were already well-capitalized in this environment, so the combination of fiscal spending and QE (“pandemic MMT”) injected those funds directly into the economy, much like the 1940s.”

When large generalist institutional investment funds, pension funds, and family offices look for an alternative to the “safety” that Bonds have offered in their portfolios over the next 3-5 years, (realizing that the cheese has moved), then there really aren’t that many safe havens to pick from. Gold is a far larger and more liquid market, that can actually absorb outflows from the Bond market, compared to Bitcoin & cryptos, or REITs, etc… To be sure, some funds or family offices may start allocating to something like Bitcoin, but for the old-guard bond investors, many of them will finally start rolling funds over into Gold.

This IS the major investment DEMAND that is coming for Gold, and it will play out over the next 3-5 years. It will only take a relatively small percentage of the “Safe Haven” funds currently in the Bond sector, to finally get allocated to Gold to make a massive difference in pricing. They won’t likely be storing bullion in a vault, so most of those investor funds, pension funds, and family offices will purchase exposure to the yellow metal through ETFs like the GLD. This will increase the ETF demand for much more physical inflows, and this massive institutional buying will be the market force that sets the pricing, more so than the retail guy or gal on the streets.

This is the prime mover in demand that is coming in the medium to longer term, and worth considering, far more than the daily gyrations or latest black swan event or Fed statement.

Most of the generalist investors working on the front lines in Wall St. or Bay St. have never really experienced a true recession or depression. Yes, there was the Great Financial Crisis of 2008-2009, but it was bailed out by what seemed radical at the time – Quantitative Easing by central banks, and government policies like home credits, cash for clunkers, appliance credits, and interventionist policies. This trend has only perpetuated all over the globe, with more and more QE, more direct purchasing of corporate bonds and securities in the open markets, and has been paired with more government stimulus. All of this ongoing easing, with near zero rates to borrow more and more money by banks and large corporations has just further spiked the punchbowl, and pushed more and more buying into the nosebleed levels the general markets have reached. A point is coming, where the jig will be up, the music will come to a screeching halt, and that game of “pump it up” will no longer work.

When the stocks top and start gradually turning down, some will buy the dip like they always have, but the markets will keep dropping, Then the selling will beget more selling, and the market function that usually provided a floor (short sellers covering as they clean up shop on a correction) won’t be there. Short sellers are nearly extinct at this point after 11 years of getting decimated. What this means is that when the selling really picks up steam, there won’t be the kind of support floor that normally is there, so it will be market circuit breakers instead, and a surging VIX.

When the generalist investors go through this, as their phone lines light up, and redemptions keep coming in, they’ll look for safety, and few older participants may remember the strange yellow relic from the past, that doesn’t do anything, and just sits there as a store of value – Gold.


Comments:
  1. On February 7, 2021 at 9:37 am,
    BDC says:

    “Then the selling will beget more selling, and the market function that usually provided a floor (short sellers covering as they clean up shop on a correction) won’t be there. Short sellers are nearly extinct at this point after 11 years of getting decimated.”

    Like Marc Cohodes: https://www.youtube.com/watch?v=j3XsoFoi30w

    • On February 7, 2021 at 12:19 pm,
      Excelsior says:

      BDC – Good post with legendary short Marc Cohodes, and he outlines nicely the value that activist short sellers bring to the market to protect investors from fraudulent business activities.

  2. On February 7, 2021 at 9:38 am,
    Dick Tracy says:

    Hey Ex, it’s all about Action and Reaction, The Fed destroyed the dollar, The Bond holders move into gold for protection. You nailed it! LOL! DT

    • On February 7, 2021 at 12:23 pm,
      Excelsior says:

      Thanks DT. Yes, the Fed has been taking plenty of Action, and as a result of the corner they’ve painted themselves into, and the narrow range yields will be trapped in for the foreseeable future, we’ll see the Reaction by the bond market over the next few years. The rates may still climb a bit further first, and this could be a headwind for the PMs, but even 1.5% won’t be anything to celebrate, with inflation growing faster, and so with real rates still negative, eventually Gold will shine as the escape hatch for the Bond market.

  3. On February 7, 2021 at 10:14 am,
    irishtony says:

    Hi . Shad you have come a long way , from your early days at the KER , i read this during the week. So good to see that CORY , had the common sence to post it as a stand alone piece…..Keep grown pal….You will soon be as good as everyone else on the site…..LOL.

    • On February 7, 2021 at 12:27 pm,
      Excelsior says:

      Much appreciated IrishT. Yes, that was nice for Cory to post that here today. Hey, we all live and learn every day, and I’m doing my best to keep absorbing, learning, and growing sir.

      As the saying goes…. “When you stay green… you grow, when you get ripe… you rot.” 😉

      I also like what the late great Jim Rohn used to say, “I’ll work on me for you, if you work on you for me.”

      Ever Upward!

  4. On February 7, 2021 at 10:35 am,
    Matthew says:

    Gold finished the week above the important “Pivot” at 1811.73…
    https://stockcharts.com/h-sc/ui?s=%24GOLD&p=W&st=2008-06-13&en=2021-02-06&id=p39691742104

  5. On February 7, 2021 at 10:38 am,
    Matthew says:

    SILJ ended the week on a bullish note:
    http://schrts.co/QjEymwcC

  6. On February 7, 2021 at 10:45 am,
    Matthew says:

    Silver also looks good:
    http://schrts.co/gxMGVHgu

  7. On February 7, 2021 at 10:47 am,
    Matthew says:

    Gold has probably bottomed but if it must make another run at a new low, it will happen quickly and come with bullishly diverging miners:
    http://schrts.co/WZcaqpEq

  8. On February 7, 2021 at 11:13 am,
    RICHARD/DOC says:

    The pressure on gold/silver and stocks will in all probability last deep into the spring of this year but then wqtch out.

    • On February 8, 2021 at 10:02 am,
      b says:

      Doc
      “Preasure on the PMs deep into spring”, do we then have the doldrums to look forward to?

      • On February 8, 2021 at 10:10 am,
        Matthew says:

        My guess is yes, after a big move.

        • On February 8, 2021 at 10:16 am,
          Glenfidish says:

          Hi Matthew,

          Could you just clarify what you mean by “Yes after a big move”?

          Thanks

          • On February 8, 2021 at 10:43 am,
            Matthew says:

            Glen, I think a big move is beginning now so we could easily have the “summer doldrums” as we so often do.

  9. On February 7, 2021 at 11:37 am,
    BDC says:

    Krell Money (just add another zero)

    In “Forbidden Planet” (1956) Dr. Edward Morbius is shown increasing input from Altair IV’s core to display the Power of the extinct Krell to a relief party from Earth.

    A bank of gauges stacked two on two around much of the control room lights up from left to right, each one indicating an exponential increase. With enough power he is able to reify abstract thoughts using a device developed to train Krell youth. In this scene his daughter Altaira appears.

    Unfortunately, like the Krell before him, all along Morbius was really opening the gate for “Monsters of the ID”:

    https://en.wikipedia.org/wiki/Forbidden_Planet

  10. On February 7, 2021 at 12:09 pm,
    David says:

    Ex:
    I think this version is better than the other one. Glad it was posted twice. 🙃

    • On February 7, 2021 at 12:28 pm,
      Excelsior says:

      Hi David and thanks. Yes, it had a few tweaks to it, and a bit more ranting. Haha! 🙂

  11. On February 7, 2021 at 11:59 pm,
    Michael D says:

    Thank you Ex! This was great!
    You and Matt should join up and create a service! You’d kill it!

    Cheers!

    • On February 8, 2021 at 2:33 am,
      Excelsior says:

      Thanks for the kind works Michael D. Glad to share ideas with the good folks here at the KE Report.

  12. On February 8, 2021 at 2:35 am,
    Excelsior says:

    Are Negative Interest Rates Coming To The U.K.?

    Feb. 06, 2021 – Russell Investments – Seeking Alpha

    Following the conclusion of its monetary policy meeting on Feb. 4, the Bank of England (BOE) made headlines by announcing that banks should prepare for the possibility of negative interest rates. “It’s important to note that the BOE stressed that this should not be interpreted as a signal that negative rates are on the way. Rather, the announcement is the BOE’s way of preparing the banking system for the possibility,” Ristuben stated.

    “With this in mind, the BOE is essentially saying that it’s going to use these next several months to seriously study the impacts that negative rates could have – and also determine the feasibility of implementing such rates,” Ristuben added.

    https://seekingalpha.com/article/4404093-are-negative-interest-rates-coming-to-u-k?mail_subject=are-negative-interest-rates-coming-to-the-u-k&utm_campaign=nl-macro-view&utm_content=link-0&utm_medium=email&utm_source=seeking_alpha

  13. On February 8, 2021 at 6:29 am,
    cfs says:

    Should be a rotation into materials AND ENERGY.

    This cycle is imminent.

    • On February 8, 2021 at 9:15 pm,
      Excelsior says:

      Agreed CFS. My point was more that the “safe haven” bond allocations in many funds will seek new shelter in Gold when they realize the old game is up. Most of them won’t pick energy as a “safe haven”, even though it is clearly a safe speculation.

      The planet’s peoples are going to want more stuff, and they are going to need more energy to power all their stuff.

  14. On February 8, 2021 at 6:45 am,
    cfs says:

    VIZSLA RESOURCES TO CHANGE ITS NAME TO VIZSLA SILVER CORP.
    Vizsla Resources Corp., in preparation for the proposed spin out of Vizsla Copper Corp., will change its name from Vizsla Resources to Vizsla Silver Corp. The name change is expected to be effective on Tuesday, Feb. 9, 2021.

  15. On February 8, 2021 at 6:48 am,
    cfs says:

    Great Bear drills 18.15 m of 13.38 g/t Au at Dixie
    2021-02-08 07:46 ET – News Release
    Mr. Chris Taylor reports
    GREAT BEAR PROVIDES DETAILED NEW SECTIONS AND DRILLS NEAR-SURFACE HIGH-GRADE GOLD AT LP FAULT: 13.38 G/T GOLD OVER 18.15 M, AND 4.25 G/T GOLD OVER 57.00 M

  16. On February 8, 2021 at 6:55 am,
    cfs says:

    Tempus drills five m of 61.3 g/t Au at Blackdome
    2021-02-08 07:12 ET – News Release
    Ms. Melanie Ross reports
    TEMPUS ANNOUNCES HIGH-GRADE ASSAYS ELIZABETH GOLD PROJECT
    Tempus Resources Ltd (“Tempus”) is a growth orientated gold exploration company listed on ASX (“TMR”) and TSX.V (“TMRR”) stock exchanges. Tempus is actively exploring projects located in Canada and Ecuador.

  17. On February 8, 2021 at 7:21 am,
    cfs says:

    Goldsource drills 34 m of 20.38 g/t Au at Eagle

    2021-02-08 07:22 ET – News Release
    Mr. Steve Parsons reports
    GOLDSOURCE ANNOUNCES HIGH-GRADE DRILL RESULTS AT EAGLE MOUNTAIN; 34 METRES (EST. TRUE WIDTH) GRADING 20.38 g/t GOLD AND 24 METRES (EST. TRUE WIDTH) GRADING 3.41 g/t GOLD
    Goldsource Mines Inc. has released drill results for the Ounce Hill prospect at the company’s 100-per-cent-owned Eagle Mountain gold project in Guyana, South America.

  18. On February 8, 2021 at 7:27 am,
    cfs says:

    Lara partner drills 20.58 m of 3.04% Cu at Celesta
    2021-02-08 08:37 ET – News Release
    An anonymous director reports
    LARA EXPLORATION LTD. – DRILLING OUTLINES OSMAR-2 MINERALIZATION AT THE CELESTA COPPER MINE IN BRAZIL
    Lara Exploration Ltd. has provided its drilling results and provided an update on development work on the Osmar-2 target at the Celesta copper mine in northern Brazil.

  19. On February 8, 2021 at 7:33 am,
    cfs says:

    Adventus, Salazar drill 16.96m of 13.6% CuEq in Ecuador
    2021-02-08 07:04 ET – News Release
    See News Release (C-ADZN) Adventus Mining Corp
    Mr. Christian Kargl-Simard of Adventus reports
    ADVENTUS AND SALAZAR ANNOUNCE DRILLING RESULTS AT THE EL DOMO DEPOSIT HIGHLIGHTED BY 13.61% COPPER EQUIVALENT OVER 16.96 METRES
    Adventus Mining Corp. and Salazar Resources Ltd. have released continued infill drilling results from the El Domo volcanogenic massive sulphide deposit located within the 21,537-hectare Curipamba project in central Ecuador.

  20. On February 8, 2021 at 8:24 am,
    cfs says:
  21. On February 8, 2021 at 8:31 am,
    David says:

    Miner algos appear “Dazed and Confused”. The insider trading PM paper fraud markets doing much better tangible miner market.

    • On February 8, 2021 at 9:05 am,
      Matthew says:

      I’m just glad so many are bearish or least full of doubt and cashed-up. I’m all in with a little leverage and will add to it.
      Glad I bought SILJ at 14.59 on Thursday…
      https://stockcharts.com/h-sc/ui?s=SILJ&p=D&yr=0&mn=5&dy=11&id=p38827164473

      • On February 8, 2021 at 9:43 am,
        David says:

        As long as they were taking it negative today, I added some Palladium One.

      • On February 8, 2021 at 10:34 am,
        David says:

        SILJ: That looks like a double gap…I guess there is nothing to fill.

        • On February 8, 2021 at 10:40 am,
          Matthew says:

          I think that 1/28 gap will remain open but who knows about today’s. If it’s going to get filled, it will probably have to happen tomorrow.

  22. On February 8, 2021 at 8:32 am,
    David says:

    bettter than tangible

  23. On February 8, 2021 at 10:56 am,
    Wolfster says:

    Great week of shows and comments. Nice essay Ex. 😎……I’ll gladly be the one to point out that pots are on fire boys. If there’s one positive out of Biden’s win it’s the euphoria it’s created for pots going forward. Leverage from the warrants has been fabulous. They’re actually trading at discount tho for some plays making for good buying opportunities still

    • On February 8, 2021 at 12:39 pm,
      Excelsior says:

      Thanks Wolfster, for the kind words and the update on the pot stocks. I appreciate your input on that sector as you have been nailing it with the companies you have discussed.

      • On February 8, 2021 at 12:47 pm,
        Wolfster says:

        Proverbial fish in a barrel category these days with pots

  24. On February 8, 2021 at 11:36 am,
    Sach says:

    Some random thoughts of mine, which are thoughts that I actually gathered from others:

    In the future, the dollar does not have to be 100% backed by gold. It can be backed 15% to 25% by gold, thereby acting as a partial tether for spending, and to restore confidence that the dollar is backed by more than just tax receipts.

    Backing the dollar by gold will likely necessitate that its price be fixed and that non-government ownership of gold be illegal. (Just like the pre-1974 time period in the U.S.) However, when something that was once legal becomes illegal, it almost always goes up in price in a new black market.

    Governments like Canada that hold ZERO gold (because they sold it all) can in a currency crisis seize private property like Gold. (Remember, they can make up the new rules.) What entitites in Canada have tons of gold laying around in vaults? Not the miners. Sprott funds PHYS and CEF do. Do not underestimate this over reaching inteference by governments. The U.K. is another country that has sold most but not all of their gold. Don’t underestimate them to make up new laws and then suddenly raid the vaults of JP Morgan in London (custodian of the gold ETFs). Of course, the above is what I consider a “hand to hand” combat scenario in the gold market. It’s every man for himself in that scenario.

    The U.S. constitution will likely be changed to allow the Federal government to bail out all the poorly run democrat states. In fact, the latest $1.9 trillion bail out package allows for a soft version of this type of bail out. But there could be severe backlash against the Federal government for doing this, including a possible tax revolt by the middle class. It is quite possible that all state taxation of income (not property) will end in all states, and the Federal government will collect additional tax and distribute it to each state (under a modified U.S. constitution). Why mention this “absurdity”? Because at the moment, there is a huge migration out of states with high state income taxes (e.g. California) to ones with low or no state income tax (e.g. Texas). Imagine your surprise, maybe 5+ years from now, after you moved to Texas, only to find out you now owe additional federal tax, which will be distributed to all states based on some formula.

    The democrats could be the majority for a long time to come. It is not like the Republicans are any different in their out of control spending. The District of Columbia followed by Puerto Rico, will likely become 2 new U.S. states with a democrat majority. Forget about the republican party in the next election. By that time a new, more centered political party will likely appear and be much more viable than any past 3rd party contenders. While a new party will provide some hope for sanity and stability, it won’t stop the coming debt implosion and follow-up debt jubilee.

    • On February 8, 2021 at 12:44 pm,
      Excelsior says:

      Thanks for posting those thoughts on Gold and currencies Sach.

      We are definitely in a time of great change, and sooner or later the chickens are going to come home to roost with the world reserve currency status the US has enjoyed for so many decades. I’m not sure what kind of “Great Reset” we are going to get, when it is all said and done, but it would be nice to see Gold included in whatever basket of currencies they settle on. It will likely be a global digital currency, based on this index of other currencies, so by that rationale Bitcoin could also be included. We’ll see how it goes, but for now, I remain diversified across Precious Metals miners, Base Metals miners, energy stocks, cash, and a few crypto miners just to cover the bases.