The latest US jobs report has stunned most analysts, with its dramatic weakness. Most investors in the Western gold community are nervous about rate hikes and this report supposedly gives the average gold investor a little breathing room.
I beg to differ. In the current situation, rate hikes are not bearish for gold prices. They’re bullish, and here’s why:
The Western commercial banks are sitting on huge reserves of cash. They built those during the Fed’s QE program. Money supply increased, but velocity decreased, because low rates hinder bank profits. That created deflation.
Deflation has continued, because the banks have no incentive to loan out their enormous cash reserves, but I think Janet Yellen plans to change that situation.
Many economists think potential rate hikes are a result of the Fed responding to “strong US growth”. There’s no question that the US is in an upcycle, but productivity is at 1930s levels in the private sector, and much lower in the huge government sector. It’s important to understand the difference between economic recovery, and a simple upcycle. The US is experiencing the latter.
Some analysts think rates will rise simply because the Fed needs the ability to cut rates in the next down turn.
I think both of these rate hike views are 100% wrong. Janet Yellen is not a hawk. She’s a dove, and doves seek higher inflation. The only sure way to create higher inflation is to increase the velocity of the money supply.
That velocity can only be achieved, realistically, through an increase in bank loan activity. Bank loans will only increase if the banks can make large profits from them. The bottom line: Rate hikes are coming, but the main purpose of them is to increase money supply velocity.
During a system risk event, money managers rush to T-bonds and gold bullion, as they did when the Fed implemented QE1 during the 2008 meltdown.
In contrast, when inflation is created without system risk, money managers tend to focus on….gold stocks.
Analysts at CNBC have a slightly different view of rate hikes than I do, but they are correctly focused on wage price inflation.
Unknown to these mainstream analysts, the elephant in the inflationary room, is the giant “QE money ball” that the banks are sitting on. When rates rise, the banks will likely begin a gargantuan lending spree. Rather than tempering inflation, Janet’s rate hikes should exponentially accelerate it.
As that happens, I expect institutional money managers to reduce US stock and bond market positions, and purchase gold stocks.
That’s the daily chart for Barrick Gold (NYSE:ABX), and it looks superb.
Most investors are focused on the $1220 area for bullion, but I think the Barrick chart is now the lead indicator for the entire precious-metals market.
Newmont Mining Corporation (NYSE:NEM) lead the first rally of 2015 for gold stocks, but Barrick is now poised to take the leadership baton, and lead most gold stocks and bullion, to higher prices.
Watch the $13.30 area on that Barrick chart very carefully. A move above that level could ignite a powerful rally in ETFs like (ARCA:GDX), (NYSE:SIL) and (ARCA:GDXJ).
Gold stock enthusiasts should book light profits in Barrick at $13, $14, $15, $16, and $17. They can use my unique pyramid generator to do that systematically.
That’s the daily gold chart. If Barrick can surge above $13.30, I think gold will quickly rise to $1255, and maybe to $1300.
That’s the hourly bars chart. A hedge in the yard needs to be pruned. Likewise, some gold market profits need to be booked on rallies. So, I sold a bit of gold at $1217, as it rallied towards overhead HSR (horizontal support and resistance) in the $1220 area.
Gold’s short-term softness could continue today. It may trade down to about $1203, and perhaps to $1195. Regardless, as the rally in gold stocks accelerates, I expect gold to successfully move above $1223, and rise to my next profit booking targets at $1240 and $1255.
Silver tends to outperform gold during rallies. Do silver stocks tend to outperform gold stocks? I don’t think so. In my experience, silver stocks tend to perform about as well as gold stocks do during metals sector rallies.
Simply put, investors who like gold should own gold stocks. Investors who like silver should own silver stocks. It’s not a question of one asset outperforming another, so much as it is about personal feelings for gold or silver.
That’s the daily chart for Global X Silver Miners (NYSE:SIL), the silver stocks ETF. The blue downtrend line is now support. My suggestion is to book light profits on trading positions at $9.27, $9.67, $10.33, and $10.82. Use Barrick’s price action as a key lead indicator for silver stocks, and be prepared for rate hikes to create a shocking rise in money velocity, and inflation!
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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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