What Repo Market Stabilization Means for the Economy, Gold and the Miners

Trevor Hall Hey, everybody, welcome to Mining Stock Daily. Before we get to our interview today, we do want to give a special thanks to today's sponsor. That's Western Copper and Gold. Western Copper and Gold is focused on developing the World Class Casino Project in Canada's Yukon Territory. The Casino Project consists of an impressive 10 billion pounds of copper and 18 million ounces of gold in an overall resource. Western Copper and Gold trades on the TSX and the NYSE American with WRN. You can be sure to follow the company via their Web site at westerncopperandgold.com. And we will have a corporate update from the CEO of the company. That's Paul West-Sells coming down the pipeline here on Mining Stock Daily in just a short amount of time. So let's get to it. Today's conversation, I welcome back my friend and colleague here on Mining Stock Daily. That is Dave Kranzler with Investment Research Dynamics. He also publishes the Mining Stock Journal and the Short Sellers Journal, which I don't think has ever made an announcement, an appearance here on Mining Stock Daily. But that's going to carry a lot of weight today as we are going to talk about the repo market with Dave. And he's been writing a lot about what that means for the overall economy here in the United States and probably the global economy as well. But before we get into that conversation, Dave, welcome to the show. How are you? And thanks for coming on.

Dave Kranzler Thanks for having me on, Trevor, and I certainly enjoy co-producing the Mining Stock Daily with you.

Trevor Hall Well, I don't feel like it'd carry as much weight without you.

Dave Kranzler So I really appreciate everything you do and all the insight and information and knowledge you provide me and our listeners. So thank you so much for that. Dave, let's get started with the repo market. It has been a topic of conversation for some time here and we can get into a couple of the movements of, you know, the decisions made by the Fed to put money into the system on this behalf over the last few weeks. But for people who maybe are maybe unfamiliar about what the repo market is, can you break it down for us and give us a little bit of a backdrop of what this means?

Dave Kranzler Sure. I mean, the repo market is essentially the market where banks lend to each other overnight. So and it's I mean, I think originally the intent was to, you know, help banks balance out the timing between deposits, deposit withdrawals and investments. So that's the Fed funds rate. Well, that's the overnight lending rate that banks borrow from the Fed and then then the repo--and then, you know, you have the overnight repo rate, which is based on the Fed funds rate. So it's essentially, a Fiat currency based fractional reserve system liquidit-- a short term liquidity management system, just would be a good way to look at it.

Trevor Hall So what really brought about--It seemed like this kind of made a quick spur... Things happened really quickly last month when we saw that rate jump to about 10% I think is what I saw. And the Fed kind of jumped in to kind of ease the tide there. But give us kind of a backdrop of what has led to that. From my understanding, it's a lack of liquidity on the dollar. Is that correct or am I wrong in that in that thinking?

Dave Kranzler Well, it's definite--So here's the thing. I mean, there shouldn't be a lack of liquidity, period. I mean, especially with all the money that the Fed has printed already. And, you know, sitting in the Federal Reserve's excess reserve account is $1.3 trillion. Now, the excess reserves are cash that banks have on hand that they don't need to use, to reserve, you know, to meet reserve requirements against their assets. So theoretically, there should be $1.3 trillion sitting in the excess reserves could have been used to fund the overnight lending market. Well, I mean, what happened was there was a--there was more demand for overnight liquidity from banks that needed the liquidity than there was liquidity being supplied by the banks that have the liquidity to supply it. Does that make sense?

Trevor Hall Yes.

Dave Kranzler And that's what happened. So the banks that needed liquidity. Some of them, you know, they started bidding up the overnight repo rate because it basically reflected their desperation to get their hands on liquidity. So, I mean, it's still I still have not seen anyone give a reasonable explanation or even try to explain why that $1.3 trillion sitting in the excess reserves was not tapped into by the banks that that own those reserves in order to fund the overnight repo market. So and in terms of what is causing the problem and you know, originally we were told it was end of quarter, liquidity means corporations have to pay their taxes. There is going to be a jump in the amount of treasuries issued. So banks need capital to fund that. Well, why not just let the market fund the Treasury issuance? You know, I'll tell you why. Because the rate that would clear all those treasuries is a lot higher than the rate is when the banks step in and buy as much--as many as they can from the government and obviously backed by the Fed. But I digress. Something caused this liquidity problem, it wasn't what they said it was originally because the liquidity issue has extended well beyond the end of the third quarter, and in fact, Friday was the third time that the Federal Reserve revised and increased the amount of money it was going to make available. Through the repo, through its repo system, and then a few weeks ago, they also introduced what they call term repos. That was a fancy name for repos that are longer than overnight that were used to plug holes during the worst part of the 2008 financial crisis. So not only did the problem not go away at quarter end, which is what the original explanations would have--would have said what happened. It's gotten worse and the feds had to, you know, every almost every week. They have to increase the amount of money that they're throwing into the banking system. So ultimately, I think I read something that said they had a secret meeting discussing this. I mean, the fact that someone knew about the meeting enough to write about it and let you know that it wasn't secret, but it sounds like, you know, it's there in the planning stages to reintroduce quantitative easing. So, I mean, again. What I believe is going on is I think that obviously there's been a massive escalation in the amount of debt since 2008 at all levels of the economy and across the globe. And a lot of that debt isn't necessarily classified as subprime, but it would have been classified as subprime 10 or 15 years ago, and I think we're starting to see--I think you're starting to see stress on that debt, in terms of the ability of the borrowers to make payments. So I think you're seeing a quiet escalation in non-performing loans and there's investors who--a lot of those loans get put into bond trust. There's investors who invest in those bond trusts and so they're owed interest payments. And if the banks have a short fund of cash coming in to service those loans, then they need to make up that shortfall in order to pass through the interest payments to the investors and the bond trust. And I think that's part of the problem.

Trevor Hall Yeah it just seems like if there's a lack of payments being made on current debt, that makes it difficult to issue new debt in the future, right. Which could potentially lead to some sort of quote unquote, credit crisis.

Dave Kranzler Well, I mean, the only reason we've been able to issue--the world's been able to issue as much debt as it has is because of all the money that's been printed.

Trevor Hall So do you think that we've seen--The dollar continues to be strong in the DXY, obviously still sitting above 98 and close to 99. Are we to a point to where people are just holding onto dollars as a safe haven and they're holding onto a very tightly and that's being one of the issues of the dollar, not being dollars, not being infiltrated into the system and being transactional more of what it needs to be?

Dave Kranzler I mean, that's a good question. I don't again, it's---I haven't seen--I haven't seen a good explanation that explains the relative strength of the dollar other than the fact that every other Western system and not just Western, I think you throw the Chinese in there also and the Japanese, their central banks are printing money at a faster rate right now than the Fed is. I mean, remember, the Fed tried to back off--or it tried to start unwinding the quantitative easing program and it didn't get very far before it had to stop and it didn't take--it took two weeks after it stopped before it had to start injecting money back into the system. So I think over the last--let's just call it the last year, most other major economies of the central banks of those countries or, you know, the EU Central Bank, the ECB, they've been printing money while the Fed was slowly like really gradually pulling a little bit out of the financial system here. So I think that's in other words--so those those countries have devalued or the EU collectively devalue their currency at a faster rate than the dollar has been devalued over the last year. I think we're probably going to see that change. I think the U.S. is going to have to really crank up the printing press at some point and then I think we'll get a reversal on the dollar. I mean, other than that, I know I hear all these explanations about, well, dollar--foreign issue, dollar denominated debt. You know, these these countries need dollars for that. And that's creating a dollar shortage, blah, blah, blah, that it's not satisfying explanations for me. I think it's a case where you just apply Ockham's razor. And that Ockham's razor for me is the U.S. has been devaluing the dollar at a at a slower rate over the last year than most other major countries.

Trevor Hall That's a very interesting thought to kind of think about. But we also know that printing more money is basically rocket fuel for gold and silver and precious metals. So what does this mean for your outlook on gold? I mean, I know you're very bullish, the yellow metal. We are in this consolidation period right now. Or we could see gold move a little bit south bound to me of that $1480, potentially $1450 range, which would be a healthy consolidation for the price. But do you think that gold's--to me, it seems like gold is kind of holding steady because of this unknown action with the dollar and the repo market and people are not ready to sell off that safe haven yet.

Dave Kranzler See, I again, I don't I don't think--I mean, obviously, the price of gold somewhat moves inversely to the dollar, right? But when you in relation to the incredible quantity of fiat currency globally, including the dollar that's been created over the last ten years. And then you can argue that that gold is very, very cheap relative to the dollar or any currency for that matter. And in fact, now I think about it, the fact that gold hit a record high in almost most major currencies. You know, over the last six to nine months, but hasn't hit a record high versus the dollar, kind of supports my theory on the rate of devaluation to explain the relative value of the dollar versus the other currencies. I mean, and again, I think when you talk about gold, you have to differentiate between the market for physical gold versus the paper gold derivatives market, because we're still in a period or in an era where paper gold can be printed in unlimited quantities. And as long as the people who are trading that paper gold are willing to accept it, you know, that's going to continue for a while. But again, it's a supply demand thing. You increase the amount of paper gold. I mean, the price of gold should be going lower with, you know, the amount of I mean, the open interest on the Comex has been flirting with--and it actually hit a record a few weeks ago. The gold open interest. So you had a record amount of paper gold issued on the Comex. And I mean, it's probably the same over in London in terms of forward. So, you know, again, I think that--I think underneath the paper gold price, which is the price that you see every day, I think there's been an incredible demand for physical gold, especially from Eastern Hemisphere, central banks, governments and in the population. So, that's what I really look at when I when I kind of project forward where I think gold's gonna go. You know, how much paper cost does it take for the banks in the central banks to hold down the price of gold versus how much gold is moving into countries like India and Russia and China? And it's actually several other countries over there that have been buying a lot of gold.

Trevor Hall Mm hmm. Well, let's talk about some of the miners here, Dave, or maybe just as an umbrella conversation about the mining sector, specifically gold mining. With the consolidation of gold, we've also seen some correction within some of the miners of precious metal and explorers of precious metal that really skyrocketed earlier this fall and late summer. Some of those really started to correct. Do you see this time period as a time to accumulate or is this kind of a let's wait and see what the price of the metals do before we buy some more?

Dave Kranzler I mean, it's impossible to time this market. It's you know, I think you just always need to, you know, funnel a little bit of your money every month into the sector, whether it's physical gold and silver or mining shares. So, I mean, just look out suddenly gold took off in May. And a lot of people were standing on the sidelines waiting for a pullback that we didn't really get until recently. I kind of was to tell you the truth, I was somewhat taken off guard by the by how quickly gold ran from essentially $1200 to close to $1600. A lot of that's fueled by hedge funds chasing the momentum. So at a point when the momentum slows down, the hedge funds are going to take profits and there's going to be a pullback. And I think that's what we're seeing right now. You know, I think there's a good chance that gold will test $1600 before Christmas.

Trevor Hall Well, that would be a wonderful Christmas gift for us all, wouldn't it? Dave, thank you so much for your time and your insights. And I will just relay to our listeners, please go to InvestmentResearchDynamics.com and be sure to look into a subscription of the Mining Stock Journal, which I believe is still $20 a month, which I spend more on beer and wine than that on a monthly basis, I'm sure. And if you're also interested to learn more about the overall health of the economy, I would also give advice to check out the Short Sellers Journal, which is also published by Dave. Dave, what else do our listeners need to know on how to reach you?

Dave Kranzler That's really it. I mean, my blog is InvestmentResearchDynamics.com. And there's links there that give you more information about both of my newsletters.  Trevor Hall All right, Dave, thank you so much. Have yourself a great day and we'll talk to you again soon.

Dave Kranzler Thanks. You, too.