Turkey: The Canary In the Coal Mine

Written by Gerardo Del Real
Posted September 10, 2018 at 3:58PM

The biggest misconception about the gold price is that it’s married to the performance of the dollar.

That has been the case for decades, but it will be different this time around once the fireworks overseas really begin.

Take a look at this chart, which was published by Business Insider and brought to my attention by Mishka vom Dorp over at Sprott.

Follow the money. It usually really is that easy. The money, in this case, leads to the canary in the coal mine — Turkey.

What does this chart have to do with gold? Is gold going higher? Is it going lower? The answer to both is yes.

The price action this year in both the gold price and the gold equities — from producers to explorers — has the feeling of a good old-fashioned bear market and this latest rally, which I believe has some legs in the short term, has all the markings of a classic bear market trap.

The latest rally comes on the back of a 19-month low, which has been driven by shorts that have taken on a record short position.

The short position this year is up more than 250% YTD to 215,000 contracts, the highest since data was first collected by the CFTC in 1993.

The collapse of Turkey’s currency, the lira, is a direct result of the actions of not-for-long dictator Recep Tayyip Erdoğan.

For years, Turkey has been on a dollar borrowing spree that has been largely financed by European money (banks and funds) chasing 20% yields under the pretense that the IMF would backstop any defaults.

The most recent lifeline thrown to the Turkish dictator came in the form of a $15 billion loan from Qatar. Good luck on calling that in.

Currencies are ultimately about the people’s confidence in the officials who manage them. That confidence in Turkey is gone.

Irreparably gone.

Ditto Venezuela.

So what does all this have to do with gold and junior resource stocks? Here’s how I see it playing out.

European banks already facing headwinds will get hit on Turkish exposure, which in itself isn’t extreme but the resulting contagion will be the nail in the coffin.

This is why the Euro reacted by hitting a 13-month low earlier this month. The Washington Post recently reported that:

Tom Kinmonth, senior fixed income strategist at ABN Amro Bank, has calculated that European bank exposure is limited in Turkey. Spain’s BBVA has significant exposure, with 31 percent of pre-tax profit coming from Turkish operations. UniCredit, BNP, ING and HSBC have smaller businesses there.

The Fed will raise rates soon — I expect two raises despite the “dovish tone” from Powell — as 2018 will prove to be the last year it has cover to do so before a dollar-led bank and bond contagion.

Bloomberg recently reported that a fifth of emerging economies and middle-income countries have debt levels above 70% of GDP.

Those debt levels will not be sustainable and the liquidity of U.S. treasuries coupled with the attractive higher rates will lead to countries defaulting from their inability to service their debt.

Like Turkey, many central banks will be forced to liquidate gold holdings. This will lead to lower gold prices in the mid term, which is why I see the latest rally as a bear trap.

This is where the shorts become our friends. Once they have their fill they will cover and that covering will be the springboard that helps set gold off to the races.

I’ve told you the end of the story before. All that bond money from Europe and European funds won’t go into the same place. Some will make it into the gold market and a trickle of that money will send gold much higher.

The Fed will then have to do what it always does: step in and unleash another round of QE. You know the name QE ‘til infinity.

My portfolio, which is leveraged to the upside (and downside during tough markets like the one we’re in), will soar and I’ll be on your Christmas list again.

How long does it all take to play out? No one knows, but the last four months of this year will provide a road map.

In the meantime, enjoy the short-term higher gold price and the coming bounce in the junior stock.

On another note, I'll be at the Precious Metals Summit at Beaver Creek from September 20-22, and the New Orleans Investment Conference from November 1-4 with Nick Hodge. If you're around, please stop by and say hello.

To your wealth,

gerardo-sig

Gerardo Del Real
Editor, Junior Mining Monthly and Junior Mining Trader.

For the past decade, Gerardo Del Real has worked behind-the-scenes providing research, due diligence and advice to large institutional players, fund managers, newsletter writers and some of the most active high net worth investors in the resource space. Now, he is bringing his extensive experience to the public through Outsider Club, Junior Mining Monthly, and Junior Mining Trader. For more about Gerardo, check out his editor page.

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