2016 Past is 2017 Prologue

With us being just over a week into the New Year, we feel it worthwhile to look back just one last time at 2016. We believe that many of the themes and risks of 2016 continue in 2017 and that they are likely to impact markets in the coming months – especially the precious metal markets.

Malcolm McDowell as Alex in A Clockwork Orange. Source: Wikimedia

We always enjoy new perspectives and every year we enjoy the witty, comprehensive and insightful analysis review of the year past by David Collum. His‘2016 Year In Review’ is in the same vein and was missed by many when it was released over the Christmas period.

Collum is a professor of Chemistry and Chemical Biology at Cornell University. In addition to his academic interests, he authors an annual review of the financial, economic and geopolitical year. The review is a must read and includes interesting information about the astute academic’s views on gold – he is “sanguine as ever holding large precious metal positions.”

He continues:

Let’s check in on what some of the wingnuts on the fringe of society are chortling about now:

James Grant also went on to say that “gold is like a monetary tonsil,” leading some to speculate that his son, Charley (WSJ), slipped him a pot brownie. Let’s see if we can get the goofs too.

We’ll begin by blowing out a few ideas I do not subscribe to. I keep hearing from smart guys that gold is in short supply in the Comex or Shanghai gold exchange, you name it. These stories almost never play out. I am also a huge fan of Rickards and Maloney, but the saying “gold is money” and the notion that its price is actually the movement of the value of the dollar don’t work for me: prices of everything I buy follow the dollar, not gold, on the currency timescales. On long timescales, their assertion may be correct. Someday their assertion may even be correct on short timescales, but that isn’t right now.

What a year: I got as many electoral delegates as the bottom ten republican candidates combined, ate python, and own as much gold as the Central Bank of Canada. Per the Bank of Canada, it finished selling off all of its gold,⁷⁸ probably to ensure that the U.S. didn’t attack. You think I jest? A WikiLeaked e-mail by Sid Blumenthal to Hillary Clinton revealed that France whacked Libya to make sure North Africa distanced itself from a gold dinar currency.^79,80 Germany supposedly has half of its requested gold repatriated from the U.S. and France,⁸¹ which could be bullish or bearish on the half-full/half-empty logic. Venezuela repatriated 100 tons of gold a few years ago and was squeezed to sell it all back in the heat of a currency crisis.⁸² The Dutch depatriated their gold this year after repatriating it not long ago.⁸³ The reasons are unclear. Alexei Ulyukayev, first deputy chairman of Russia’s central bank, assured us Russia will continue to buy gold (Figure 7), presumably as a defense against interventions from inside the beltway. Of course, the Fed is silent on the “metal whose name shall never be spoken.”

Figure 7. Russian gold reserves

In a shockingly quiet year given how much gold moved to the upside before the post-election monkey hammering, we probably should finish with some generic goofiness. On a few occasions, gold took the beatings that are familiar-huge futures dumps in the illiquid wee hours of the morning when no price-sensitive investor would ever consider selling. It dropped $30 in seconds late on the day before Thanksgiving when nobody was paying much attention. Another hammering came from a $2.25 billion sale⁸⁴ and another $1.5 billion sale,⁸⁵ both of which occurred in under 1 minute. Nanex concluded that the algo “gold spoofer” was at play,⁸⁶ but the 2016 poundings were transitory and toothless compared with their brethren in 2011–2015. Trouble in the ETF market was revealed when BlackRock was overwhelmed by GLD buying.⁸⁷ It was forced to create more shares in February than it had in a decade. I retain previously stated convictions that GLD is a scam-fractional-reserve gold banking. Deutsche Bank was overwhelmed by requests for physical gold.⁸⁸ It tried to shake the hook by demanding that such a request must be made at a participating bank.⁸⁹ Deutsche Bank, the location of the request, is not a participating bank? I imagine it doesn’t have the gold, consistent with its troubles outlined below. A Swedish precious metal vault got its payment mechanism terminated without explanation.⁹⁰

We can’t close without talking about gold’s kissing cousin-silver. The silver market gets its share of muggings and sustained bashings, at times spanning several weeks. The silver sellers didn’t get full traction either, however, bringing silver off a 50% gain but leaving it up 15% year to date. Silver market treachery got some attention. The London Silver Fix-truth in advertising-at times deviated markedly from the spot price,⁹¹ causing consternation among those attempting to fix the price. Deutsche Bank agreed to settle litigation over allegations it illegally conspired with Scotiabank and HSBC Holdings to fix silver prices at the expense of investors.⁹² A class action suit against Scotiabank suggested that the conspiracy spanned 15 years.⁹³ JPM was cleared of silver manipulation in three lawsuits-all dismissed with prejudice, an altogether different form of “fix.”⁹⁴ The only remaining question is why they are stockpiling huge stashes of physical silver.⁹⁵

I’m as sanguine as ever holding large precious metal positions. Gold bugs are reminded, however, of what a big victory will feel like: