When titans clash, reverberations are felt around the world. The US central bank has begun a titanic clash with the US government, and as the battle unfolds, all markets will be impacted significantly.
This short-term chart shows gold beginning a small uptrend, with higher lows and higher highs.
A broadening formation is now in play on this key daily gold chart.
Broadening formations are formed by higher highs and lower lows, and these patterns indicate a loss of control in the market.
I predicted the Fed would hike rates in 2015, and that would be a warning shot to the US government to get its financial house in order, or more hikes would follow.
I do not believe the Fed’s first rate hike had anything to do with GDP or employment, and nor will the rate hikes that follow. The Fed is enticing banks to move the “QE money ball” out of government bonds and T-bills, and into the private fractional reserve banking system.
There, it can be loaned out more profitably, and money velocity will begin to rise. For the first time in US history, rate hikes are not being used to cool inflation, but to heat it up. Rate hikes raise the cost of borrowing money for the government, and for stock market buyback programs that have created questionable price/earnings ratios in the US stock market.
Gold is trading in a broadening formation because institutional investors are beginning to sense a loss of control, emanating from both government and central banks.
I expect gold will trade essentially sideways until mid July, which is when it often bottoms anyways. That’s because early preparations for gold-oriented Diwali begins in India, and demand begins to surge.
Demand from India was weak in 2013 because of the imposition of a duty and import restrictions, and in 2014 and 2015, because the monsoon season in both years was very dry.
The 2016 monsoon season looks good. It should produce great crops, and gold demand from millions of farmers will rise significantly as that happens. India just killed the tax on cash purchases of jewellery. That’s very good news for farmers. They will be holding a lot of cash as their crops are harvested.
Also, if Janet Yellen hikes rates in July, not only will she be hiking just as Indian demand picks up, she will be doing so just as the US stock market enters what I call “crash season”. That’s the August – October time period.
If Janet hikes in September, the damage to the US stock market could be even worse. Goldman analysts predict she will hike in both September and December. That would put enormous pressure on both the US stock market and US government bonds.
Powerful JPMorgan (NYSE:JPM) analysts have forecast gold will surge to $1400 in the second half of 2016, and now Citi adds a nice price forecast.
This is the (NYSE:GDX) daily chart. I realize that some of the “old guard” of the Western gold community envisioned gold soaring to stratospheric prices as the US government debt crisis deepened.
Gold forecasts of $1400 from banks like JP Morgan may not sound very exciting to investors who envisioned gold at much higher prices by now, but it’s important to understand that it only takes a modest amount of upside action in the price of bullion to create dramatic movement in the price of gold stocks.
Gold bullion rose about 25% from the December lows to the May highs, and GDX surged about 100% in the same timeframe! Many individual gold and silver stocks staged “five bagger” and “ten bagger” performances.
This is the daily silver chart.
Silver bullion rallied about 30% from the $14 area lows to about $18.
In the same time frame, the Global X Silver Miners (NYSE:SIL) silver stocks ETF surged well over 100% higher. What is even more important, is that while silver bullion has now fallen about 25% from the $18 area high, the SIL silver stocks ETF is only down about 15%!
How is it possible for gold stocks and silver stocks to pullback so slightly, after such a huge rally, even while bullion has a solid pullback?
It’s possible because so many powerful value-oriented institutional investors are showing great concern about coming inflation, loss of control in government and central banking, and overvaluation of the US stock market. They are buyers of gold stocks and silver stocks on price corrections, price rallies, and when they trade sideways!
A real correction is coming to the gold market, but I don’t believe it will happen until well into the 2017 calendar year. A lot of US economic reports will be released this week, including the jobs report on Friday morning. Gold has a strong tendency to rally following the release of that report.
Investors who may have recently become somewhat obsessed with calling a gold price correction may want to consider throwing a bit of caution to the wind. This is a time for investors to position themselves for the next wave higher, and for gold stocks, that wave may just begin on Friday morning!
Written between 4am-7am. 5-6 issues per week. Emailed at aprox 9am daily.
Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form. Giving clarity of each point and saving valuable reading time.
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