December Rate Hike… Or Not.

December Rate Hike… Or Not.

Jim Clark


Wednesday last week, Fed Chair Janet Yellen said “At this point, I see the U.S. economy as performing well,” noting the strength in domestic spending and that it may be “appropriate” for a rate hike in December. The Chairman of the New York Fed, William Dudley said he “fully” agrees with the Chair. The yield on the two year Treasury then rose to 0.84%, the highest rate since spring 2011. We remember that gold then rose to nearly $1,900 within months.

Vice Chairman of the Fed, Stanley Fischer supported this early warning (head fake) with the comment that, “US inflation is not as low as you think,”. For those of us who do our own grocery shopping this is not news.

Then on Friday, Yellen said, “if the outlook worsened” the Fed would consider negative interest rates. It is obvious to any casual observer that the Fed is policy planning on a month to month basis reactively. This is not policy planning, it is panic. Negative interest rates will cause irreparable harm to the savings of retirees and anyone dependent on savings for income. How do we protect ourselves from this policy of wealth confiscation?


We and James Rickards have been warning about looming shortages of physical gold and silver for over a year. Rickards has been warning for at least two years that availability, not price will be the biggest issue for precious metals investors.  At the retail and wholesale levels, this shortage has manifested most visibly in the silver markets since August of this year. The US Mint has put its authorized dealers on restricted allocation since running out of silver in July. The Canadian Mint is currently not shipping silver Maple Leafs. Wholesalers of silver have pushed out delivery times from five days earlier this year to eight weeks for bulk silver products.

I have written over the last several weeks about the developing shortage of gold in the COMEX warehouses. For us at ground level, this has been a “stealth” shortage. Well, this stealth shortage has reached near crisis levels for commercial investors who take delivery of physical gold against their futures contracts. In September of 2013, there were 73 paper contract demands on every ounce of gold held in the COMEX warehouses.  Since over 99% of these contracts settle in $USD, this ratio is not particularly alarming.  This shortfall of physical gold to contract demand has risen dramatically to never before seen levels.

As of this writing, there are now 293 ounces of COMEX paper gold claims against each ounce of registered physical gold held by the COMEX.  COMEX warehouse gold is at historical lows. This is, by far the highest paper to physical ratio in COMEX history. Why is this important? This means that the large institutional and individual investors are taking delivery of their gold. Investors are removing their gold from COMEX warehouses and storing it, rather than trust the increasingly risky paper system. As we have always maintained, do what the big boys do (not what they tell you to do).

In the last two delivery months, JP Morgan has saved the COMEX from defaulting on deliveries by transferring gold from their proprietary account the COMEX account to meet delivery demand. With serious competition from the Shanghai Gold Exchange, which settles in physical gold only, what happens if COMEX loses its status as the world’s gold pricing venue?

Although it seems unlikely at this time, what happens to the price of physical gold if COMEX defaults on delivery? We will be looking down on the previous high wishing we had bought more.

By withdrawing their gold, the large gold investors are telling us that a default risk is greater than at any time in history. Own physical gold.


If you are in the Phoenix area this Tuesday, you need to register now for our free seminar at KTAR Studios! Both new and seasoned investors will take away some new knowledge of the markets, while one lucky attendee will even take away an investment-grade coin in our drawing. There are only a few seats left, so register now. I hope to see you there.

“I’ll be keeping a sharp eye on the market and I encourage you to do the same!”