Why I'm Changing My Allocation of Silver and Gold From 80/20 to 50/50

I've been touting triple digit silver since 2021. But now that the price of silver has surpassed the century mark per troy ounce, I judge that the case for owning gold may be stronger than the case for owning silver. However, recognizing that there is a significant probability of this prediction being wrong, I'm only going to a 50% silver allocation versus a 50% gold allocation. This keeps me in a good position regardless of which of these precious metals has the greater appreciation in price. And I judge that the price of both silver and gold are headed higher. 

In the case of silver, I think the adage that the cure for high prices is high prices may come into play. If the price of silver keeps rising, there could be significant demand destruction. A key driver of the rise in price of silver could evaporate.  If the industrial use of silver declines (solar panel usage as an example) the excess consumption versus production that has been in effect since 2021 may reverse. For reference, according to the Silver Institute states:

• Overall, 2025 will see the fifth successive deficit; albeit lower y/y, it is still estimated at a sizeable 95Moz. For 2021-25, this results in a cumulative deficit of almost 820Moz. 

The other primary driver in the increase in price of silver is that it is a monetary metal. And given the size of US debt ($35.8 trillion) and the almost certain likelihood of continuing enormous budget deficits, the rational for US investors to buy silver to protect again inflation remains incredibly valid. And time will tell whether this week's events have given added momentum to the "sell America" trade.

GOLD

So while the price of silver is likely to continue on an upward path due to its monetary value, I judge that the pure play monetary metal play, gold, may be a better investment. A huge driver in the increase in the price of gold has been its accumulation by central banks. And central bank buying (40 tons per month according to the World Gold Council) is a bazooka that does not have a silver buyer equivalent. While gold is used for jewelry, dentistry and has industrial applications, these are minimal compared to its purchase as a financial asset.

Thus, I'm reallocating gold to being an equal weigh portion of my investment portfolio versus silver  due to it being a more of pure play for protecting myself from US monetary debasement. 

CAVEATS

Will I regret reducing my position in silver? Maybe:

1. The available supply of above ground silver is very tight. There could be a silver short squeeze that drives the price much higher. I just saw a prediction that it could drive the price to $500 per ounce. That seems a bit out there, but $150 to $300 an ounce is not totally out of the question.
2. The market for silver is 1/10th the size of the market for gold and the price is much more volatile. Thus, if the increase in buying demand for silver is anywhere near that of gold, then the increase in the price of silver will outpace that of gold.

Historically, the gold to silver price ratio is 50:1 to 80:1. As if April 2025 it had gone to 100:1, meaning that an ounce of gold was worth 100 ounces of silver. But recently the ratio has compressed back to about 50:1. Given that the ratio in the ground is 7:1 (7 times as much silver), further compression of the ratio is certainly possible, but my guess is that it is headed back toward the middle of the historical range.

Spineless, Shortsighted Republicans Are Going To Get Wiped Out In 2026 Midterm Congressional Elections

The President's party has lost seats in the House of Representatives in each of the last 5 mid term elections.  According to Poynter "Political scientists call this the “thermostatic” effect — voters adjust how they vote, as they would a home thermostat. The common pattern of voters from the opposition party being more energized to vote is closely related; it stems from anger serving as a stronger motivator to vote than contentment." 

Here are the results by election: 

This trend will be exacerbated by Trump's unpopularity and by the Republican's in the House: a) failing to take a stand during the confirmation process for his awful Cabinet nominations; b) refusing to push back on his stupid tariff actions, c) taking no action on Trump's Executive Orders; and d) remaining silent in regard to the plethora of Trump's other unhinged actions and statements. The Republican party now owns the actions of Donald Trump, Robert Kennedy Jr, Kash Patel, Pete Hegseth, and Elon Musk. 

A significant reason for the failure to stand up to Trump is the threat of being primaried by a MAGA candidate. These threats puts the Republican control of the House in a no win situation. If a moderate Republican Congressman stands up to Trump and then gets primaried by a MAGA candidate, it would be a tough election. But by not standing up to Trump, these Republican Congressman will be incredibly vulnerable in the general election due to Trump's unpopularity. And further, if a sitting Republican Congressman loses in the primary to a MAGA candidate, many of Trump's selections will get trounced in the general.

How many seats in the House will the Republicans lose. Much depends how things go between now and November 2026 midterm election? But I will be surprised if control of the House does not revert back to the Democratic party.

Read More:

DOGE Could Have Been A Huge Win, But Sledgehammer Approach May Lead To Nasty Blowback

Trump's Economy: Higher Inflation, Reduced GDP Growth, and a Larger Deficit

DOGE Could Have Been A Huge Win, But Sledgehammer Approach May Lead To Nasty Blowback

The Federal budget cutting that Donald Trump and Elon Musk unleashed could have been a huge win. DOGE would likely remain popular if it focused on the following: 1) cutting fraud and waste; 2) eliminating DEI spending: 3) a hiring freeze, and 4) retirement buyouts. But the sledgehammer approach DOGE has taken will likely turn a win into a loss. The downside of indiscriminate actions such as the mass firing of Federal employees with less than 1-2 years of experience (probationary employees that don't have Civil Service protection) may give Democratic Congressional candidates potent ammunition in 2026.

Time will tell what the downside of the sledgehammer approach to budget cutting will be. Here are a sampling of some of the issues that may appear in 2026 Democratic attack ads:

1) IRS cuts during tax season may lead to slower refunds

2) FAA cuts may lead to more flight delays

3) Forest Service cuts may lead to more damaging forest fires

4) FDA cuts may lead to slower approvals of life saving drugs. 

5) Energy Department cuts may lead to even slower approvals of project approvals that could reduce power outages

6) Health and Human Services cuts may lead to fewer services for transgender people (about 1% of the US adult population)

And in addition to the above, an unexpected black swan event(s) are likely to develop that will have a negative impact. There will be lots of potential ammunition for Democratic attack ads

Beyond the negative impact of reduced Federal government service on a broad swath of the US population from the firing of probationary employees, the human cost to these fired individuals is beyond measure. While some will find new jobs quickly, others will be totally screwed by their loss of income. Expect their heart wrenching stories to be featured in attack ads. 

Conclusion

A odds of blue wave in the 2026 Congressional elections seems reasonably high. And while DOGE cost cutting currently enjoys significant popularity, my guess is that the sledgehammer approach may be a big factor in Dems being able to generate a strong turn out of motivated voters.

Trump's Economy: Higher Inflation, Reduced GDP Growth, and a Larger Deficit

Higher Inflation

Listening to an interview this morning with Trump's senior counselor for trade and manufacturing, Peter Navarro, it provided an example of how Trump is surrounding himself with sycophants that are unlikely to push back on his obsession with tariffs. Trump and Navarro are going through mental gymnastics to avoid admitting that tariffs are a tax that will have an inflationary impact is on the US economy.

Navarro and Trump bring up three examples to make a case for the benefits of imposing tariffs on US imports. 

1) From 1798 to 1913 tariffs accounted for over 50% of US Federal Revenue. Sure, using a precedent from the horse and buggy era is convincing.

2) President Trump speaks fondly of William McKinley, the 25th U.S. president who was a strong advocate for tariffs.  But did the McKinley tariff of 1890 work? It was meant to protect domestic industries, but raised prices and became extremely unpopular. It led to the Democrats gaining the majority in the House, ousting 83 Republicans, and overturning the tariffs in 1894. 

3) Navarro stated that Trump's first term tariffs did not raise inflation. While most economists agree with this conclusion, the American Economic Association takes a negative view about the tariffs

In the wake of this increase in trade protection, the United States experienced substantial increases in the prices of intermediates and final goods, dramatic changes to its supply-chain network, reductions in availability of imported varieties, and the complete pass-through of the tariffs into domestic prices of imported goods. Therefore, the full incidence of the tariffs has fallen on domestic consumers and importers so far, and our estimates imply a reduction in aggregate US real income of $1.4 billion per month by the end of 2018. 

The first Trump administration tariffs were targeted and only applied to products valued at about $380 billion in 2018 and 2019 and generated approximately $80 billion in revenue (not even enough revenue to cover two weeks of the US Federal deficit). 

But while the tariff revenue Trump plans to raise is a moving target, it seems appropriate to guess his broad based tariffs will be a multiple of the revenue of his first term's tariffs.

According to the Tax Foundation, historical evidence and recent studies show that tariffs are taxes that raise prices and reduce available quantities of goods and services for US businesses and consumers, which results in lower income, reduced employment, and lower economic output.

Not surprisingly, the supporters of tariffs fail to mention the 1930 Smoot-Hawley Tariff Act, the most recent example of the US implementing hefty tariffs. It significantly raised tariffs on a variety of imported goods in an order to protect American industries and agriculture. However, it had profound negative consequences on international trade. One result was that Europeans retaliated with their own protective tariffs, leading to a decline in global trade. The Smoot-Hawley tariffs deepened the economic collapse of the Great Depression. Hmmm, what are the chances of our trading partners launching retaliatory tariffs or of reducing travel to the US.

Reduced GDP Growth

US deficit spending has been an important factor in the strength of the US economy. While it is critical to rein in the huge deficit, the chainsaw that Musk and the DOGE commission are welding may have a short term negative impact on the  US economy. The spending and employment cuts are coming prior to the other actions that could serve as a counter weight (regulation cutting, reduced taxes, and drill baby drill).

Larger Deficit

Trump's proposed tax cuts could reduce Federal revenue by as much as a trillion dollars per year even if the Tax Cut and Jobs Act is extended. Check out the chart from the Committee for a Responsible Federal Budget for details on Trump's proposed SALT Relief, and cuts to taxes on Tips, Overtime Pay, Social Security, and Domestic Production.

Conclusion

The stock market has moved higher since Trump's election. Time will tell if the the stock and bond market continue to gain between now and the Congressional elections in 2026. And trying to predict inflation, GDP growth, and the US deficit following the 2026 elections, particularly if Democrats gain control of the House, seems beyond the capabilities of my crystal ball.

Will The Reports On The Gigantic US Trade Deficit Ever Push The Price of Gold and Silver Higher (in US dollars)?

There were a bunch of financial reports this morning. But the one that caught my attention was the US trade deficit. Essentially, the rest of the world provides the US with stuff and they get US fiat in return. The U.S. trade deficit in goods widened 6.3% to $102.7 billion in July, according to the Commerce Department. IMHO this should have crushed the US dollar and this should have led to the price of gold and silver in US$ going higher. But the other reports were mostly good news, so interest rates went up, pushing the US dollar index (DXY) higher, and a drop in the price of gold and silver futures was what actually occurred.

The US trade deficit reports are seldom market moving news. But for gold and silver investors that are protecting themselves from US dollar debasement it's a data point that seems like it should be meaningful. How much longer will the rest of the world want to hold US dollars and give us stuff in return for fiat as the US debases the dollar via the enormous trade and Treasury deficits?

Size of US Treasury Note Auctions This Week Is Stunning Given April Is Rare Month When Net Revenue Is A Surplus

As I type this, this morning's price of silver is down over a dollar an ounce and gold is down over $64 an ounce. But glancing at the size of the US Treasury Note auctions has me more convinced than ever that an upward trend is the price of gold and silver continues to be inevitable.

The US Treasury is auctioning $173 billion in notes this week. The ongoing debasement of the dollar in order to cover the immense US spending deficit seemingly ensures that the price of gold and silver is headed higher.

Treasury Note Auctions This Week

$69 Billion - 2 Year Notes - 2/23/24

$70 Billion - 5 Year Notes - 2/24/24

$44 Billion - 7 Year Notes - 2/25/24

Total - $173 billion in Note auctions this week

Last year, the US ran a deficit in 10 out of 12 months. April was a rare surpus month ($177 billion) due to the timing of the April 15 tax deadline. But regardless of the fact that the Treasury may be in surplus this month, there is little relief in their need to raise dollars via auctions.

Am I making too big a deal out of one deficit figure? Maybe. The total being raised by the US Treasury this week is lower than most recent weeks. Specifically, Bill sales are lower than most recent weeks ($215 billion this week versus $300 billion or higher weeks not being unusual.) And there are not any bond auctions this week.

Regardless, the growing amount the US Treasury needs to auction off every week to refund the expiring $34 trillion in debt and to cover the deficit is eventually going to crush the US dollar and lead to the price of gold and silver skyrocketing higher

Protect yourself from US dollar debasement. Consider allocating a significant percentage of your investment dollars to precious metals. 

Personally, I am a fan of silver because it offers more leverage than gold. However. this also makes it more risky than gold as the downside moves, as well as the upside moves, are larger than for gold.

If you are interested in direct exposure to the price of silver, take a look at the PSLV etf. It's the silver ETF preferred by many silver bulls. 

My favorite option for buying silver is offered by First Majestic. Their prices are competitive for all buyers, and they offer a $0.50 an ounce discount to stockholders.   

Full disclosure - I'm a First Majestic stockholder (stock symbol - AG). 

2024 Is Likely To Be Another Year With A High Level Of Hurricane Intensity

According to https://tropical.atmos.colostate.edu/Realtime/index.php?arch&loc=northatlantic, the accumulated cyclone energy of North Atlantic cyclones has been above 95 for each of the past 8 years (2016 thru 2023) and above 100 for 7 of the last 8 (2022 was the outlier with 95). Comparing this result to the previous 30 years, 14 out of the previous 30 years had accumulated energy below 95 (47%). I doubt many readers of this blog will be surprised by the fact that years with accumulated cyclone energy of North Atlantic hurricanes with high intensities are becoming more frequent.

I conducted this review because I speculated it highly likely that given the warmer ocean temperatures, that the Carribean Islands, Atlantic and Gulf of Mexco coastal communities are likely to be devastated by the next round of hurricanes following the flip of ENSO to La Nina.

However, when comparing accumulated energy years to El Nino and La Nina years, I found that while there is definitely a correlation, it is not as strong as I had expected to find https://ggweather.com/enso/oni.htm. While El Niño generally tends to suppress Atlantic hurricane activity, and La Niña tends to enhance it, an eyeball review of the results suggests that it does not appear to be highly predictive of whether there will be destructive hurricane activity in 2024. Thus, if there is a flip of the ENSO cycle from El Niño to La Niña, as some forecasters are predicting, it makes a devastating hurricane season more likely but not a certainty.

While coastal communities may not be as vulnerable to hurricanes in 2024 as I had supposed before starting this review, I fear that the warmer ocean temperatures will lead to more devastating Atlantic hurricanes in the not too distant future during both El Niño and La Niña years.

Why Do The Gullible Folks In The Right Wing Echo Chamber Think That A Regional Winter Cold Snap Proves That Global Warming Is A Hoax?

We're in the midst of winter and much of the US is in the middle of a cold snap. Shocking, right? Yet, as typically happens during a regional cold snap the right wing echo chamber is filled with posts claiming that frigid weather during winter and rescheduled NFL games proves global warming to be a hoax. These claims ignore that the portion of the U.S. hit by this cold snap is a fraction of global surface area. Moreover, it is common for localized incursions of Arctic air masses to be compensated for by warmer-than-normal conditions in other areas of the mid-latitudes.Frankly, anyone that is paying attention should realize that weather is so variable that regional US cold temperature records are commonplace even while locations south of the equator are sizzling. For reference, from January 2020 through November 2022, 91% of 245 locations measured had more record heat than record cold. 

Here's a news flash, when the US suffers through what is likely to be the hottest summer in recorded history during 2024 with hot temperature records being set throughout the country, there will almost certainly be cold records set during the winter season south of the equator. However, it seems probable that globally the hot temperature records will be about 3 times as frequent as the cold termperature records.

If along the lines of climate science deniers, I was to cherry pick a variable data set to make an outrageous claim, it would be that sea level rise has gone parabolic. Check out the chart below. The increase in sea level between May 4 and September 29 is a bit frightening. If the 4.7 mm (0.36 inches) increase in sea level rise is extrapolated out to a full year, that's about 0.8 inches of sea level rise per year and over 8 inches per decade. Whoa, sunny day flooding is already becoming a problem. Eight more inches of sea level rise by 2034 would convert sunny day flooding from a major nuisance into a coastal real estate catastrophe. Even if there is another 0.8 inches of sea level rise in 2024, it will be a problem for low lying coastal cities such as Charleston.

However, a close review of the chart indicates that upward spikes occurred in 2011-2012 and 2014-2015 and were both followed by declines in sea level. Thus, reversion to the mean of about 1/8th inch of sea level rise per year seems at least as likely as a continued rise of 0.8 inch a year. 

https://climate.nasa.gov/vital-signs/sea-level/

In conclusion,  the right wing echo chamber is very effective at amplifying climate disinformation. They cherry pick data, utilize obscure data sources, and make a big deal of the wildest faulty predictions made by individual climate researchers which never obtained widescale acceptance. On the other hand, climate science researchers don't need to do any cherry picking as the results of a warming planet are abundant.

Related Posts

Climate Science Deniers Have Uncovered 1,600 Scientists Who Signed A There Is No Climate Emergency Declaration. That is 0.02% of the 8 Million Scientists In The World

Got A Climate Change Denial Opinion Piece For The WSJ? No Need To Worry About Editor Fact Checking - Global Temperature

Large US Treasury Bond Auctions May Be Good Gold and Silver Dip Buying Opportunities

The market is starting to choke on the massive size of US Treasury auctions. Auctions sizes are particularly large currently as Treasury refills its coffer after emptying most of the surplus during the close to the wire negotiations on the US debt limit. We're talking $500-600 billion in debt being auctioned off every week to pay off the expiring bonds that fund the soon to be $34 trillion debt, as well as to cover the monthly deficits. And with the US running $100-200 billion monthly deficits, that's an additional $25 billion or more in debt that needs to be raised every week.

On Wednesday demand for the 20 year bonds being auctioned off was underwhelming. So, interest rates went up, the US dollar index (DXY) responded by going higher, and that led the alogos to sell off gold and silver futures. The Wednesday dip in the price of gold and silver futures was reversed the next day.

In a more rational world, weak bond auctions would be a sign of trouble for the US dollar, and the prescious metal futures would go higher. And eventually, that will be the case. But for now, don't be surprised by dips in the price of gold and silver after weak US bond auctions. 

While there are no long term bond auctions scheduled for the rest of 2023, there will be a heavy schedule next month. But with the enormous funding requirements, Treasury auctions can not be completely shut down for the rest of December. There will be 5 and 7 year note auctions next week (12/27 and 12/28), but these auctions are much less likely to lead to fireworks than long term bond auctions

Climate Science Deniers Have Uncovered 1,600 Scientists Who Signed A There Is No Climate Emergency Declaration. That is 0.02% of the 8 Million Scientists In The World

Most people know someone that is brilliant yet has no common sense. Thus, the fact that climate science deniers are making a big deal about finding 1,600 scientists from random fields that have signed a declaration that "there is no climate emergency" is little more than fodder for their echo chamber. I'm pretty certain with a sufficient effort I could find 1,600 scientists to sign a declaration stating that "God (or the devil) placed dinosuar bones in the ground to test Christians' faith".

To deny that there is a climate emergency, these 1,600 scientists (0.02% of the total) have to overlook the following:

1. Hurricanes and typhoons are growing in intensity at rates never experienced during the satellite era. They are becoming increasingly deadly (the climate science deniers talk about there not being a significant increase in the number of hurricanes, but there has never been a consensus among mainstream climate researchers in regard to frequency, only that intensity would increase).
2. Deadly flooding is becoming increasingly common. A warmer atmosphere holds more moisture—about 7 percent more per 1.8°F (1°C) of warming—and a significant increase in atmospheric moisture is present due to the air holding more moisture as it warms.This added moisture powers heavy rainstorms becoming flooding events.
3. Sea level is rising by 1/8th inch per year globally and by more in many locations. In the past 20 years, the rate of sunny-day flooding has doubled. Compared to 2000, it's increased 400% on the East Coast and 1,100% on the Gulf Coast. As an example, Charleston SC flooded about 1 out of every 5 days in 2019, and the sunny day flooding problem is worsening.
4. Some areas of the Middle East are too hot for human survival without the aid of air conditioning, fans or shade. The limit is somewhere between 104 and 122 degrees Fahrenheit if you're sitting perfectly still, according to a study conducted in the United Kingdom. Other research focuses on wet bulb temperatures.
5. The capability of the oceans to support seafood harvesting is diminishing. 

 A. Coral bleaching is occurring globally  For example, a recent paper shows that around 70% of reefs are now net erosional in the Florida Keys, meaning they are losing more habitat than they build. And the Great Barrier Reef has experienced mass bleaching events in 1998, 2002, 2016, 2017, 2020 and 2022. An estimated 25 percent of all marine life, including over 4,000 species of fish, are dependent on coral reefs at some point in their life cycle. The reefs provides essential food, shelter and the spawning grounds needed for their species’ survival. When their homes disappeared, the fishing industry becomes less productive. 

B. The acidity of the ocean has increased by 26% since the beginning of the industrial era. For oysters, scallops and other shellfish, lower pH means less carbonate, which they rely on to build their essential shells. As acidity increases, shells become thinner, growth slows down and death rates rise.The shellfish industry is experiencing higher mortality rates. Many shellfish farmers have had to add soda ash to their hatcheries to permit the seed clams, oysters and geoduck to thrive. 

Conclusion

The social conservative echo chamber is very effective at amplifying climate disinformation. They cherry pick data, utilize obscure data sources, and make a big deal of the wildest faulty predictions made by individual climate researchers which never obtained widescale acceptance. The amount of coverage of a declaration by 0.02% of scientists from an assortment of fields is a good example of how effective the social conserative echo chamber is at promoting their denial of climate science.

Will Climate Change Suppress The Price of Tech Stocks Due to Crop Failures Keeping Food Costs and Inflation High?

In the financial markets, it seems stunning how nonchalant the vast majority of investors and commentators are to the risks to stocks and bonds from climate impacts. However the world's largest  investor, Norway's sovereign wealth fund, is cutting their tech exposure due to global warning.

For reference, Norway's sovereign wealth fund, the world's largest stock market investor with $1.4 trillion in assets under management,made a stunning profit of $143 billion for the first half of 2023, due to the growth of U.S tech companies (the AI craze).

But they are cutting back on tech exposure. Their CEO stated that global warming is lowering food harvests, and thus increasing food prices. The fund expects it will be difficult to reduce inflation worldwide due to high food prices. And high inflation leads to high interest rates. High interest rates produce a poor risk reward for owners of pricey tech stocks versus earning substantial interest fees from bonds. This makes tech investments signifiantly less attractive and far less likely to increase in price.

While food shortages may be the first climate impact to hit the financial markets, the markets seem oblivious to the multitude of long term impacts that are likely to wreck economies worldwide (along with potentially causing mass starvation and making large swathes of the globe unlivable).

Got A Climate Change Denial Opinion Piece For The WSJ? No Need To Worry About Editor Fact Checking - Global Temperature

Climate change deniers have a couple of go-to websites; temperature.global and UAH Global Temperature. The deniers cherry pick data from these two websites and ignore the fact that the information these two sources provides is at odds with all other credible global temperatures, land air temperatures, marine air temperatures, sea surface temperature, sub-surface ocean temperatures, lower atmospheric temperatures, sub-surface land temperatures, and sea level rise as a metric of a warming climate system. A sampling of the more credible sources are NOAA, NASA, the UK Met Office, and the Japan Meteorological Agency.

In a July 8 Opinion article published in the Wall Street Journal, the author claims "Hottest Days Ever? Don't Believe It". Steve Milloy's data source supporting his claim is the obscure weather.global website. Milloy suggests that the University of Maine's Climate Reanalyzer report that July 3 and 4 were the hottest days on record is not believeble because it is not comfirmed by temperature.global. However, Milloy conveniently fails to mention that NOAA also confirmed this factoid (The National Oceanic and Atmospheric Administration is a scientific  agency within the United States Department of Commerce), And given that killer heatwaves are scorching the US Southwest and Louisiana, Mexico, China, India, and the Middle East, it's challenging to give credence to a data source that has failed to measure a July temperature spike.

The WSJ's editors seemingly failed to catch this bit of hypocracy. Milloy argues that temperature stations utilize corrupted data. But guess what the temperature.global site utilizes to compile it's reports? Yup, surface temperature measurement versus the satelite data utilized by Climate Reanalyzer. And NOAA's methodology is provided on the following webpage: https://www.ncei.noaa.gov/products/land-based-station/noaa-global-temp

It's long past time for the WSJ to stop allowing their "Opinion" section to be filled with misleading climate change editorials featuring manipulated data and cherry picked data sources.

Fed Chair Powell's Attempt At Stand-Up Comedy

Guest post by OtareMilclub, a frequent contributor to Reddit.

At his May FOMC press conference, Mr. Powell tried his hand at stand-up comedy by saying "banking conditions have broadly improved since March." Could it really be possible that he can be so blind to what is actually happening within the banking system?

A banking system can only function properly when certain parameters are in place. Banks need to pay depositors a rate that is close to what they can receive from short-term Treasuries and that interest rate should also be above the rate of inflation. Most importantly, the rate paid on banks' liabilities (deposits) needs to be below the rate it receives on its assets (loans). A steep yield curve, where short-term rates are several hundred basis points below long-term rates, is conducive for a healthy banking system to exist.

In this scenario, deposits are sticky because there is no motivation to leave the banking system for the relative safety of T-bills; and banks can easily turn a profit due to the positive-sloping yield curve. The situation we have today is the exact opposite. Banks are now paying depositors far below what they can receive from a risk-free, short-term Treasury Bill, and that rate is nowhere near the increase in the Consumer Price Index. The risk of bank runs increases when the deposit rate cannot compete with that of inflation and the rate offered on T-bills. It just does not make any financial sense at all to keep your money in a place where the risk is greater, and the reward is far less.

Case in point, the FDIC placed First Republic Bank (FRB) on Receivership last Friday. It is the 4th such bank since early March to fail. The list so far is Silvegate Bank, First Republic Bank, Silicon Valley Bank, and Signature Bank. These are not all insignificant financial institutions. Excluding Silvergate, they were the 2nd, 3rd, and 4th largest bank failures in history. The deposits and assets of the erstwhile FRB bank were sold to none other than Jamie Dimon's JP Morgan (JPM). Of course, the shareholders get wiped out; but JPM gets their assets for dimes on the dollar, and the deal comes with a government backstop on potential losses as an added incentive.

I'm sure there's nothing to see here, though; these collapses are just aberrations. So, just buy, buy, buy stocks. But please indulge me while I inject some reality into the evaluation. Do you want to know what is really plaguing the entire banking system? It is actually very easy to understand once you open your mind to the simple truth. A plethora of high-risk loans were made when money was virtually free during 10 of the last 14 years. This secular system of free money led to a 40-year-high rate of inflation. CPI at over 4x the Fed's target compelled Mr. Powell to jack up interest rates by over 500 bps in just over one year. Hence, bank assets, and the income stream they provide, are worth far less than T-bills.

For example, one of a bank's largest assets is mortgages. The Fed pushed the overnight interbank lending rate to the floor and bought $2.6 trillion in mortgage-backed securities to push the cost of buying a home to a record low. In fact, the 30-year fixed mortgage rate was below 3% from July of 2020 thru March of 2021. Rates even plunged to a record low of 2.65% by early 2021. And, 30-year Fixed rate mortgages have been below the current Effective Fed Funds Rate (EFFR), which is now just over 5%, since May of 2010. This was not an issue for banks as long as inflation remained quiescent, and both the EFFR and T-bill rates were near zero percent. But that all changed when the CPI soared to 9% by the summer of 2022, and the risk-free rate on short-term government debt climbed to match that of the Fed Fund's target rate of 5-5.25%.

The problem is banks cannot pay depositors anything close to what they can now receive from a risk-free T-bill yield. Otherwise, they would be paying depositors more than they are currently receiving from a good percentage of their assets, and their profit margins would disappear. However, if banks don't begin offering much better rates to their customers' liquid deposits, it will lead to more money fleeing the banking system, which is a drain on reserves and curbs banks' ability to lend. This exacerbates the drain on reserves already occurring from the Fed's ongoing QT program. Banks are then forced to sell assets to meet liquidity requirements, which then puts further downward price pressure on these same assets and attenuates banking reserves further. Thus, expediting and intensifying the recession that is already in progress. In the end, the size of the bank is irrelevant. All banks suffer under this same dynamic—even the bigger ones—just to different degrees. Banks have already significantly tightened lending standards. And now, they will be forced to tighten lending practices even further due to the escalating deposit flight and increased regulatory oversight. Of course, mortgages are not the only loans made to consumers and businesses during the Fed's ZIRP regime that would face margin pressure if banks deigned to pay depositors a rate that is even close to what they can receive from T-bills. Net interest margins would shrink across the board.

The deep state of Wall Street is desperately trying to convince investors that the current array of banking failures is idiosyncratic and isolated. That is the new definition of insanity. Think about it…what do you think will happen to banks' assets when the unemployment rate begins to rise? Or, how much damage will be done to the commercial mortgage-backed securities market when the $2.5 trillion worth of "vacant" commercial real estate loans have to be refinanced? How about the Trillion-dollars' worth of collateralized loan obligations that will falter as the economy begins to contract?

In other words, we have yet to see the recession become manifest, which is so very clearly predicted by the National Federation of Independent Business' small business survey, the Index of Leading Economic Indicators, plunging money supply growth rates, the soaring net percentage of banks that are tightening lending standards, and inverted yield curves. The Fed's additional 25bp rate hike after the May FOMC meeting will serve to exacerbate and expedite the coming recession. And, once that economic contraction finally does arrive, we can expect the stress in the banking system to greatly intensify. The mainstream financial media is ignorant of this fact, but the regional banking index is not. The KRE regional bank ETF is down over 40% since February 7th of this year.

Sorry, Mr. Powell, the trouble in the banking system has only just begun. Investors would be wise to stay extremely defensive with their asset allocations until the Fed and Treasury are able to adequately re-liquify the financial system. But let’s see them try doing that without causing inflation to run intractable.

Magical Growth In US Construction Employment According To BLS

Here is a number that does not pass the sniff test. 

According to a US Bureau of Labor Statistics, "Construction employment grew by 24,000 in February, in line with the average monthly growth of 20,000 over the prior 6 months".  

The question becomes how much of the overstated number is due to: 1) crappy survey methodolgy; 2) a flawed seasonal adjustment factor; or 3) a ridiculous assumption about the "birth" of new constuction firms.

Does it seem likely that construction employment is growing when office construction is in a death spiral due to work from home, retail constuction is stunted by Internet shopping, and new home construction is being blunted by lack of affordability due to 7% mortgage rates. It seems instructive to review construction job openings. Construction job opening plummeted by a shocking 240,000 in January (the most recent report) according to an Associated Builders and Contractors analysis of data from the U.S. Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey.  

And I'm not the only one that questions the BLS employment numbers. On December 12 the Philadelphia Fed’s new experimental algo predicted that the BLS had overreported tolal jobs growth by 1.1 million.

Time will tell whether the BLS releases more magical employment numbers in the upcoming months.

More US Dollar Debasement. The US Government Ran Up A $262 Billion Deficit In February. Up from $217 Billion Year Ago

The US debt continues to explode higher. February deficit was $45 billion dollars higher than the year ago February deficit. Receipts were down and outflows were up

February receipts - $262 billion vs $290 billion previous year

February outflows - $525 billion vs $506 billion previous year

Deficits by month so far this fiscal year

October - $88 billion vs $165 billion previous year (only month with a bigger deficit last year)

November - $248 billion vs $191 billion previous year

December - $85 billion vs $21billion previous year

January - $39 billion deficit vs $119 billion surplus previous year

February - $262 billion vs $217 billion previous year

Fiscal 2023 Year To Date Deficit After 5 Months - $723 billion

So that makes 5 consecutive months in which the deficit has been $45 billion or more larger that it was in the previous year (fiscal 2022). And in both this month and in November, the outlays were essentially double the receipts. 

Would you be surprised if the US hits the debt ceiling even earlier that Janet Yellon is projecting?

Will The Massive Monthly US Trade Deficit Reports Be Reflected In The Price of Silver?

There has been a lot of recent attention focused upon the US debt, deficit, and debt limit. And while the US debt is a critical source of US dollar debasement, surprisingly little attention is being paid to the US trade deficit. This is in large part due to many economists argueing that the US trade deficit doesn't matter.

Here's the current situation according to the Council On Foreign Affairs, "The US dollar’s role as the global reserve currency and primary tool for global transactions means that many other countries rely on holding dollar reserves, creating massive demand for U.S. financial assets. This means that the U.S. pays little for its foreign borrowing, allowing it to finance its high consumption at low cost."

But since the BRIC countries and even Saudi Arabia have indicated a desire to reduce their dependence on the US dollar, the DXY (US dollar index) has been declining. And since the DXY does not include the currencies of any of the BRIC countries or Saudi Arabia, the actual decline of the US dollar may not be adequately reflected by this index (The U.S. Dollar Index contains six component currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc**).**

So in this enviroment of de-dollarization being bandied about and support for the petroyuan, I suspect that the era of the US trade deficit not mattering may be coming to an end. If China and other export oriented economies lose interest in recycling the dollars they obtain by supplying the US with goods into US treasuries, the trade deficit will matter.

In regard to how little the markets seem to judge that the US trade deficit matters, it may be illuminating to look at what has happened to the Comex price of silver on the days when the US monthly trade deficit has been reported. And given that the price of silver has been driven largely by moves in the DXY index, it would seem logical that if the trade deficit mattered to the markets, then the DXY would be down on days when the massive US trade deficit was in focus and that would lead to the Comex price of silver being up. But as shown below, this has not been the case:

US Trade Deficit Report by U.S. Bureau of Economic Analysis (Initial Report)

Report Date - 1/5/23 - November deficit - $61.5 billion - Comex price of silver - Open $23.94 - Close $23.37 Change - Down $0.57, -2.25%

Notably, this report was spun as being good news as the deficit declined from the previous month. Yikes, but I have trouble wrapping my mind around how a trade deficit of $61.5 can be good news

Report Date - 12/6/22 - October deficit - $77.8 billion - Comex price of silver - Open $22.43 - Close $22.34 Change - Down $0.10, 0.37%

Report Date - 11/3/22 - September deficit - $73.3 billion - Comex price of silver - Open $19.23 - Close $19.43 Change - Down $0.20, -0.84%

Report Date - 10/5/22 - August deficit - $67.4 billion - Comex price of silver - Open $21.13 - Close $20.68 Change - Down $0.58, -2.63%

Report Date - 9/2/22 - July deficit - $70.6 billion - Comex price of silver - Open $20.34 - Close $20.14 Change - Down $0.20, -1.1%

The fact that the daily price of silver has been down during the last 5 times when the US trade deficit has been reported seems to support a conclusion that at the very least the folks trading silver don't seem to think the US trade deficit matters. (you have to go all the way back to June '22 to find a month in which the price of silver went up on the day BEA reported the US trade deficit)

For reference, the December US trade deficit will be released on February 7, 2023. (please see update for more recent reports at bottom of post)

Regardless of whether the US trade deficit matters, the combination of the trade deficit, the US Government deficit, and de-dollarization will likely lead to further debasement of the US dollar.

It makes it understandable as to why US precious metal investors are protecting themselves from dollar debasement by acquiring gold and silver. My guess is that we will see record high gold and silver prices in the not too distant future.

4/7/23 Update

Report Date - 4/5/23 - February deficit - $70.5 billion - Comex price of silver - Open $25.18 - Close $25.04 Change - Down $0.14

Report Date - 3/8/23 - January deficit - $68.3 billion - Comex price of silver - Open $20.165 - Close $20.15 Change - Down $0.015

Report Date - 2/7/23 - December deficit - $67.4 billion - Comex price of silver - Open $22.50 - Close $22.38 Change - Down $0.12

How Long Until The Massive US Trade Deficit Crushes US Dollar And Becomes A Gold and Silver Tailwind?

The monthly US trade deficit will be reported tomorrow (1/5/23). And based on past results, as long as it comes in reasonably close to the forecast, it probably will not have much immediate impact on the price of silver. The median forecast is for it to be US$63 billion, down from the previous trade deficit of $78 billion. And of course this decrease can be spun as great news. But to paraphrase Everett Dirksen, $63 billion here, $63 billion there, and pretty soon you're talking about real money".

As long as the US dollar remains the world's "trusted" reserve currency, the trade deficit does not seem to be a concern of the markets. But if the US dollar starts getting dumped, the massive trade deficit is going to be ever harder to sustain. And the dual deficits of trade and US goverment spending are leading to ever greater dollar debasement

Thus, while based on recent results, it does not seem like the trade deficit is going to have much of a short term impact on the price of gold and silver, on a long term basis, it seems likely to be supportive of higher prices..

Trade Deficit By Year - 2017 thru 2020

• U.S. trade balance for 2020 was $651B, a 9.21% increase from 2019.

• U.S. trade balance for 2019 was $596B, a 0.01% increase from 2018.

• U.S. trade balance for 2018 was $596B, a 10.42% increase from 2017.

• U.S. trade balance for 2017 was $540B, a 6.65% increase from 2016.

Source - Macrotrends.net