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Weekly Metals Report: Critical Juncture

by Stephen Penny, FTM Daily:

The metals traded lower last week, once again testing support near $1308 / $18.50and are in clear short-term downtrends.  Gold has closed lower 7/8 previous trading sessions and silver 6/8.  The only bright spot in the metals complex this week was a rallying copper price, which tends to benefit silver.

Once again the dollar rally corresponded with a rise in treasury yields.  Recent Treasuries held in Custody (TIC) data showed foreign central banks selling U.S. debt at a record pace.  If this trend persists, it will leave the Fed as the “buyer of last resort.”  The U.S. simply cannot afford to allow interest payments to rise.  Consider that,  with a $20 Trillion debt burden, each 1% rise in interest rates equates to an additional $200 Billion of interest payments annually.  When rates return to levels more in alignment with historical norms, themajority of Federal tax receipts will go towards interest payments on the national debt.Contemplating the implications of that eventual reality is worth serious consideration, and there’s no time like the present to begin positioning accordingly.  Here is a great place to get started.

Another wildcard for the metals will be the Bank of Japan meeting this Wednesday, which will coincide with the Federal Reserve meeting the same day.  An aid to Prime Minister Abe suggested that negative rates have been beneficial [huh?], which could signal rates going even further negative.

Speculation and opinions abound as to whether the Federal Reserve will raise interest rates at their Sept 21st meeting next week, and the outcome will likely determine the short-term direction of the metals.  The heavily short commercial banks would like nothing more than to see initial support levels give way.

It’s instructive to consider whose interests the Federal Reserve is actually concerned with, when considering its next move.  I see several options:

  1. The citizens.  Now that is funny!
  2. The Banks.  As a private institution with shareholders and a revolving door between the banks and the Fed, they clearly have a vested interest in enacting policy that benefits their banker buddies.  There’s a case to be made that slightly higher rates will benefit the “too-big-to-fail” banks in the short run.
  3. The political establishment.  A measly 0.25% rate rise has the potential to completely derail an incredibly fragile economy and stock market to the detriment of the political establishment. Personal opinion aside, Janet Yellen and company do not want a Trump presidency.

    image-9-14-16-at-7-32-am

    Of that “positive”-yielding debt, approx $14.5 trillion yields between 0 and 1%. About 75% of the world’s sovereign debt yields <1%. Just 6% of outstanding government bonds yield >2%

  4. Some other entity.  Although speculation, it’s entirely possible that the Federal Reserve is ultimately beholden to the World Bank, IMF, or some other global entity. After all, we know that over $16 trillion was allocated to foreign corporations and banks during the 2008 fiscal crisis.  Follow the Money.

With approximately 75% of the world’s debt yielding less than 1%, it’s difficult to imagine rates going up anytime soon.  In fact, it’s very possible that we will see a move towards zero or negative before any type of rate increase.  The market is only pricing in a 15% likelihood of an increase next week, but is still placing the odds of a hike by December at 43%.  If the Fed relents and it becomes clear that a rate hike is not forthcoming, I view that 43% as potential “fuel” for a short-covering rally in the weeks ahead, as trading positions are realigned.

Read More @ FTMdaily.com

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