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The last time Europe had at least two consecutive months of deflation was in late 2014/early 2015 when the ECB launched its sovereign QE, and when prices staged a modest rebound into the rest of the year. One year later, it's more of the same, and as Eurostat revealed earlier today, after a headline price drop of -0.2% in February, March prices declined once more, this time by -0.1% in line with expectations, driven by a -8.7% plunge in energy prices.

 

Company earnings, a key driver of business spending and employment, tumbled in the fourth quarter and history shows that when they retreat, the economy often follows.

 

For example, 2015 turned out to be a record year for total U.S. and Indian silver imports. Combined U.S. & Indian silver imports didn’t just surpass the previous record set in 2014… IT SMASHED IT by 20%:

Another record silver factor that occurred in 2015 were Official Silver coin sales.  Not only didOfficial Silver coin sales hit 130 Moz  in 2015, it surpassed the previous record set in 2011 (116.4 Moz) by a hefty 12%:

One more thing.  I don’t know if you all noticed in the first chart, but according to the data put out by the World Metals Statistics, they show a slight decline in global silver production in 2015:

Examine the silver (times 700) to DJIA ratio over the past 30 years.  This excludes the 1980 bubble in which the ratio peaked many times higher than the 2011 ratio.

1. The 30 year ratio shows long term trends of investor preference for paper assets, such as the DJIA, versus hard assets such as silver.
2. Silver prices and the ratio hit a multi-decade low in November 2001, as indicated by a green oval.
3. The ratio is only slightly higher in 2016, as indicated by the other green oval.
4. There is considerable room for the ratio to increase, which would probably involve a somewhat lower DJIA and a much higher price of silver.

Buybacks, which reached a monthly record in February and have surged so much they make up about 2 percent of daily volume, are customarily suspended during the five weeks before companies report quarterly results, according to Goldman Sachs Group Inc. With the busiest part of first-quarter earnings seasons beginning in April, the blackout is getting started now.

Precious metal prices eased ahead of this week's 2-day FOMC meeting, which ended on Wednesday.

Gold had drifted $30 lower before recovering it all in a matter of minutes on Wednesday afternoon EST, after the rate decision was announced. The FOMC decided not to raise rates, despite a pick-up in core inflation and employment figures, indicating the FOMC's targets had been satisfied. It was the prospect of the Fed's dual mandate being met that had 

persuaded observers, the majority of which agreed that a rise in interest rates would be deferred, that the odds of a rise next month should shorten. That prospect appears to have receded as well.

In the wake of the FOMC's rate decision, the dollar weakened sharply against all major currencies. Markets have suddenly come alive to inflation risk, with core CPI rising in recent months to 2.3%. Consider this leading price-inflation indicator together with the Fed's reluctance to tighten, and it is obvious why the dollar should suffer.

Gold rose by $30 on the week to trade at $1259 in early London trade this morning, and silver by $1.40 to $16.05. Silver's rise yesterday (Thursday) and in early London trading this morning stands out, and it is making new highs for this year. As can be seen in the introductory chart it has caught up some of the lost ground compared with gold. So at long last, silver is showing better relative strength, with the gold/silver ratio dropping below 80 to 78.5.

The most likely explanation for silver's sudden spurt is a combination of poor market liquidity and a revival in demand for industrial metals. Copper rose strongly as well, and from the mid-January low the price has risen by over 18%. Nickel and iron ore prices have also risen strongly. The rise in industrial metal prices was wholly unexpected in western capital markets, and may be due in part to unexpected Chinese demand, as stockpiled dollars are dumped in favour of stockpiling key metals.

The strength in industrial metal prices, as well as that of crude which is up 50% in five weeks, augers well for precious metals in the coming weeks. The general tone of the market feels positive, even though gold was subdued following its post-FOMC spurt. However, while the bullion banks take every opportunity to close some of their bear positions, they have been unable to spook the bulls. The chart below is of gold's open interest on Comex, and it can be seen how changes in open interest correlate to price movements.

This is normal bull market behaviour. It should also be noted that for the second week in a row, open interest has set new records of over 500,000 contracts, indicating the underlying buying power in the market.

It has transpired that Munich Re, the large German reinsurer, is adding to its holding of physical gold. It should be noted that insurance companies and pension funds are badly impacted by negative interest rates, and in the case of Munich Re it will have significant exposure not only to the Eurozone, but also Japan, Switzerland and Scandinavia. While Munich Re has a history of diversifying its portfolio into investments such as physical gold, it is reasonable to expect other insurers and also pension funds to follow it, as long as bond yields remain supressed at current levels.

John Butler – ‘Rally in Gold Represents the Beginning of Something Much Larger’

the inventory-to-sales ratio for the entire economy is now at 1.40X—–a ratio last recorded in May 2009.

As Zero Hedge so aptly put it:

“Look at this chart!”

German reinsurer Munich Re is boosting its gold and cash reserves in the face of the punishing negative interest rates from the European Central Bank, it said on Wednesday.

The world's largest reinsurer is far from alone in seeking alternative investment strategies to counter the near-zero or negative interest rates that reduce the income insurers require to pay out on policies.

Munich Re has held gold in its coffers for some time and recently added a cash sum in in the two-digit million euros, Chief Executive Nikolaus von Bomhard told a news conference.

"We are just trying it out, but you can see how serious the situation is," von Bomhard said.

The ECB last week cut its main interest rate to zero and dropped the rate on its deposit facility to -0.4 percent from -0.3 percent, increasing the amount banks are charged to deposit funds with the central bank.

ECB policy has caused financial market interest rates to fall, reducing the return that insurance companies can earn from investments in bonds, hurting profit and raising concerns about their ability to meet future promises to policyholders.

Gold and Silver will thrive – as paper assets are increasingly infected by financial viruses.

Following the recessionary surge in Wholesale Inventories-to-Sales ratio, this morning's Total Business inventories-to-sales rose to 1.40x - the highest since May 2009. With a 0.4% slump in sales and 0.1% rise in inventories, the smell of recession lays heavy on US businesses... but then again - who cares if Draghi can keep buying 'assets' and saving the world?

Look at this chart!

Highest Reading = March 2000. The S&P 500 fell 43.40% over the next three years.

Second Highest Reading = January 2015. The S&P 500 has fallen 7% since (13 months).

Third Highest Reading = September 1968. The S&P 500 fell 1.70% over the next three years.

The most recent Chicago PMI reading of 42.9 has never been this low outside of a recession.

At October-end, the sector recorded one of the highest P/S ratios ever. Only the two-year window of the dot-com bubble produced higher readings.

When margins shrink, business activity contracts. Businesses cut budgets and jobs. Recessions typically follow. Stock prices tend to fall more than 10% in recessions.

Despite a sharp run-up over the last two months, gold's consolidation of previous strength has been a three-week sideways affair.

Gold's price started the week at $1260 and as of this morning (Friday 0800 London time) was $1271, after trading as high as $1282 overnight. Silver moved from $15.58 to $15.64 at the same time. For gold, the three-week consolidation of the previous rise now appears to be complete.

The technical position has improved sharply, and chartists will generally be enthusiastic. I describe the current bullish set-up in my Insight article, published yesterday.

The bullion and investment banks have been generally caught unawares by gold's performance, and have thrown the kitchen sink into the futures market to try and stop the rise. Open interest hit a record of 499,110 contracts this week. From the end of January, when the bears had finished closing their positions and the hedge funds began to turn bullish, extra paper gold was conjured out of thin air by the bullion banks totalling the equivalent of 391 tonnes of gold worth $16bn. If physical demand continues to build, bearing in mind that gold ETFs have seen net inflows every day for the last six weeks, there will be some serious losses for the bullion banks to absorb.

Comex's open interest and the gold price for the last ten weeks is shown in the chart below.

The small downturn from record open interest is worth discussing. It also happened on or about the 18th February and the 25th February. In the past three years, a falling price was often accompanied by an initial rise in open interest, reflecting bullion banks increasing their shorts in an attempt to drive the price down. This tactic has capped every rally in the market during the course of this bear market.

desks are quietly taking the opportunity to cap their shorts as and when they can. If this is so, it indicates that the bullion banks recognise they have a problem on their hands.

The most important news during the week was the ECB's actions to rescue the Eurozone from a prospective deflationary spiral. The announcement yesterday initially caused European equities to rally sharply, and for gold to fall $15, presumably reflecting the knee-jerk jump in the euro exchange rate. It turned out that this was very much the wrong reaction, with the German DAX index quickly losing over 5% from its best level, and gold rallying strongly to close up $18.

Let us recap the main points of yesterday's announcement. The ECB is deepening negative rates with the deposit rate to be set at -0.4% from Wednesday. Quantitative easing will be expanded an extra EUR20bn to EUR80bn per month, and will include investment grade bonds issued by non-financial corporations for the first time. A new series of targeted long-term refinancing operations (TLTROs) will commence in June. The TLTROs are a mechanism that allows the ECB to pay money to the banks at the deposit rate, fixed for four years, to encourage them to lend.

These measures are designed to stimulate confidence in the markets, maintain over-valued asset prices, and thereby encourage economic growth. The risk is they will be regarded as a sign of desperation, only matched by the impotent actions of the Bank of Japan. Indeed, it is hard to see how they will work, when the banks themselves are already over-geared on their balance sheets and have difficulty raising new primary capital, restricting their ability to expand their lending.

The Eurozone has only one card left to play, and that is fiscal stimulus. The removal of austerity becomes increasingly likely, which is probably what the gold price is trying to tell us.

Peter Schiff: I was right about everything!

SHARES OF ITALY’S LARGEST FINANCIAL INSTITUTIONS HAVE PLUMMETED IN THE OPENING MONTHS OF 2016 AS PILES OF BAD DEBT ON THEIR BALANCE SHEETS BECOME TOO HIGH TO IGNORE.  AMID ALL OF THE RISKS FACING EU MEMBERS IN 2016, THE RISK OF CONTAGION FROM ITALY’S TROUBLED BANKS POSES THE GREATEST THREAT TO THE WORLD’S ALREADY BURDENED FINANCIAL SYSTEM.

AT THE CORE OF THE ISSUE IS THE CONCERNING LEVEL OF NON-PERFORMING LOANS (NPL’S) ON BANKS’ BOOKS, WITH ESTIMATES RANGING FROM 17% TO 21% OF TOTAL LENDING.  THIS AMOUNTS TO APPROXIMATELY €200 BILLION OF NPL’S, OR 12% OF ITALY’S GDP. MOREOVER, IN SOME CASES, BAD LOANS MAKE UP AN ALARMING 30% OF INDIVIDUAL BANKS’ BALANCE SHEETS.

“The Brazilian economic downturn took a real turn for the worse in February,” according to Markit’s Composite PMI, which collapsed to record lows at 39.0. Despite a slightly less bad than expected GDP print this morning (still down a record 5.89% YoY), hope was quickly extinguished as PMIs showed economic activity continuing to contract at a record pace, job losses accelerating, and manufacturing’s collapse accelerating. As Market sums up, “With the global economy also showing signs of slowing, which will impact on external demand, it looks as if the downturn is set to continue to run its course in the coming months.”

GDP was a disaster (but better than expected)

Markets finally adjusting to reality that we're entering recession

Gold has had a good week, breaking out from a consolidation pattern, and heading into new high ground for this year.

Silver, which has been left behind, appears to be merely pulled along in gold's wake. As of early this morning UK time, the gold price is at $1,261, up 19% on the year, while silver is a little better this morning relative to its recent underperformance at $15.30, so is up only 10.5% on the year. Silver's underperformance is a mystery to many, probably explained by the big money shifting into gold having been dangerously underweight, while the silver price is still reflecting moderating industrial demand. The result is the gold/silver ratio is now over 82 times.

Whoever is buying gold is probably less of an important issue than the simple fact that prices rise when there are more buyers and sellers. We started from a base of maximum bearishness, with traders and investors in western financial markets owning almost no gold. On Comex, traders were actually net short last December, a hitherto unprecedented situation. It is from these extremes that gold and gold-related investments, such as the mining companies, have soared. Gold is the best performing asset measured over the first nine weeks of 2016, and portfolio exposure is close to zero.

So the strength of gold is taking everyone by surprise. The common view of analysts in the investment houses appears to be there is no need yet to review their price targets, which are variously between $950 and $1300 for the year end. From being outright deniers of the investment merits of gold, many of them have moved to defend their position by saying it is 

based on their economist's economic forecasts. Read this as code for "it's not my fault I'm getting it wrong, I'm just reflecting the house view".

The financial establishment has missed the boat, and is probably only a marginally reluctant buyer on balance. But what trader can look at gold's performance, shown in the next chart, and keep short positions running?

 

BlackRock’s Gold ETF (IAU) has seen fund inflows every day in 2016 (no outflows at all) and with the stock trading above its NAV for most of the year, the world’s largest asset manager has made a significant decision:

*BLACKROCK SAYS ISSUANCE OF GOLD TRUST SHARES SUSPENDED DUE TO DEMAND FOR GOLD

It appears the huge demand for physical demand is finally catching up with the manipulation of paper prices.

The daily (above) and weekly (see Figure 2) momentum models have moved to new one-year highs (lower arrows), offering both short and intermediate-term Buy signals. The next step would be for a pullback to hold at a higher low, above the December low, and perhaps complete a year-long reverse “head-and-shoulders” bottom (see Figure 2, saucers) which would extend the basing process. Thereafter a higher high would establish a new uptrend, the first in years.

While "greed was good" in the '80s, it appears "gold is good" in the new normal. As much as the barbarous relic is despised by all the mainstream money-peddlers in public (aside from those who have left the familia like Alan Greenspan), it seems to be loved in private. Central banks have been net buyers of gold for eight straight years, according to IMF estimates, the longest streak since the first troops were deployed in The Vietnam War.

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Watch out because a key stock benchmark is close to a “bearish crossover,” warn chart watchers.

The S&P 500 SPX, -0.81%  is not far from having its 10-month moving average cross below its 20-month moving average from above for the first time since 2008, says Jonathan Krinsky at MKM Partners in a note dated Sunday.

There have been just two other such crossovers in the last 22 years, and “both coincided with cyclical bear markets,” cautions Krinsky, MKM’s chief market technician. His note offers the chart below.