As predicted in my Current Thoughts, the Fed did not raise interest rates and Yellen once again has egg on her face from last December where the Fed was scheduled to have 3 or 4 more rate increases for 2016. Now there may be zero rate increases if what I foresee occurring in the economy takes place. What this means for gold and silver at present is a micro move up like I have been calling for, before the net move lower.
Gold is finally above resistance of $1,300 and is within range of the $1,300 to $1,400 mark I showed it could reach in my April 20 article when gold was trading at $1,234.60 and silver at $16.30. I said back then that silver could hit $18, which it did, before pulling back, and is trying once again to break through that $18 resistance.
The dollar and gold are not trading inverse of late because of the added strength the dollar is getting from a weaker euro caused by the coming Brexit vote June 23. Once the vote is over with we may get a bounce in the Euro and a weaker dollar for a short term move, and this should push gold up to its last leg higher before the rug is pulled from under her.
Q: Doug, why do you think that gold has not bottomed and is ready to explode higher?
To think that gold will explode higher, one has to believe the Euro, yen, and pound, which make up 80% of the dollar would move higher as the dollar implodes. That’s just not going to happen. You’ll notice that negative interest rates are at play around the world and U.S. treasuries have been strong, catching most by surprise. I have been uber bullish on treasuries because of this perception around the world that the U.S. is the last bastion of safety and some interest in a safe vehicle is better than zero or negative interest, which is what U.S. treasuries are paying. But at what cost is this to insurance companies, pension plans, seniors on a budget who rely on CD interest, social security recipients? It’s a huge cost, but now take that to the rest of the world and the contraction that is occurring and you should be able to presuppose what happens next; a 2009 style crack up that is simply waiting for a catalyst. While it won’t be the same reasoning, you have to realize that we have not had in the U.S., a deflationary episode since 1933.
Most who sell gold talk of the following reasons to own;
- inflation
- dollar is going to crash
- massive debt
But what has occurred since 2011? There has been no real inflation as commodities hit new lows through January of 2016. We have seen an uptick in prices since then but can you have inflation without money velocity ticking higher?
The dollar is not crashing and hasn’t been since 2011 when it was in the low 70’s. We hit 100 and are simply in a pullback to a measly 94 range and now all of a sudden gold is going to the moon? With no other reasoning other than the Fed not raising rates? Do you realize the Fed didn’t raise rates from 2011 through November 2015 and gold fell with lower rates? Now all of a sudden higher rates or the potential of higher rates is bad for gold and the fact the Fed is not going to raise rates is good for gold? No. This is a dollar story and nothing more. While it is not an exact dollar story, it IS a dollar story for all commodities.
If the dollar is going to continue the decline, then as I said, the euro, yen and pound would have to rise in value. We are seeing the Yen rise in value, but Shinzo Abe, with a declining export and aging population, and the world’s largest Debt-to-GDP ratio has to make a move and make it soon. The yen has to weaken in order for it to create demand for Japan’s products and increase GDP. Japan’s Debt to GDP stands at 232.5%.
This leaves us with the pound and euro. The coming vote on Great Britain leaving the European Union has been Euro negative. Once this vote occurs on June 23rd, we could see a temporary move up in the euro but at some point another European country will have issues (besides Greece). Many readers may not be aware but the Debt to GDP ratios for Italy is 147.4%, Ireland 132%, France 116%, Portugal 142.2%, Spain 111.5% and Greece 171% all of which are worse off than the U.S. How can this not be viewed as anything but euro negative and dollar bullish (micro moves aside as nothing goes straight up or down). The UK is about on the same page as the U.S. for debt to GDP, but is losing strength in currency with the assumption they will be leaving the European Union which again we’ll know more about next week.
The bottom line for these countries is if we are contracting then growth will not keep up with debt obligations. I don’t know how investors can discount the data that continues to come out negative on a global basis.
Please note that I did not include China in the above analysis as it is not part of the Dollar Index, but they too have to go through a major contraction. I have said before that it used to be “how GM goes, so goes the nation.” and how it has been changed to “how China goes, so goes the world.” It was just last year when China sneezed and the DOW fell 1000 points in one day. Gold went from $1,166 and fell to $1,120 in 4 days and $1,057.40 by Nov. 27th ($,1060 December 30th).
What I’m trying to do is make the connection here that while gold is still in a mini-bull market, it is not off and running. Gold is only where it was a month ago with the dollar hanging in there and we’ll see what issues pop up abroad eventually.