Gold has bounced from the $1,050-$1,100 range it had traded in for a while and moved up about $150. I keep getting emails asking whether I think the $1,000 mark can still be broken.
For those who have followed my call for lower prices in gold, my advice remains the same; dollar cost average into your allocation in precious metals. Whether or not gold falls below $1,000 is secondary in nature, and only relevant for those who want to time the market. That said, I am still part of the camp that says we will fall below $1,000 in price, yet all we have seen in this latest move up in the price of gold is a dollar decline. This will not last.
The price of gold broke out of the range and at the same time the dollar did too, as the chart below shows. But also, the dollar bottomed and gold topped at the same time. In addition, on Monday, with U.S. markets closed, they reversed together, again, with gold moving up $8 and the dollar falling 15 cents.
Zooming out, we see the dollar is still in a bull market and gold is still in a bear market, both since 2011.
What Is the Fed Thinking?
For over a year we have heard the financial media call for higher rates, in search of a reason to be long stocks. Quantitative easing was ancient history according to these folks and they needed the Fed to raise rates to give them confidence their beloved stock market would continue on its merry way higher. But a funny thing happened on the way to the forum (yes that is a reference to an old movie and to the fall of the Roman Empire).
The Fed ignored all of the economic data that mattered and concentrated on unemployment figures. Their theory was that as long as unemployment was dropping, inflation would come. But unemployment data at best is skewed and anyone who looks at the U-6 data saw that before the Fed decision to raise rates, the U-6 rate that takes into account those who are marginally attached to the labor force and total employed part time for economic reasons actually rose from 9.8% in October to 9.9% for November. The Fed somehow missed this in their decision making process.
While CNBC’s Steve Liesman and the Fed were expecting 3-4 rate increases for 2016 after the Fed raised rates on December 16th, I had this to say after the announcement, in my Current Thoughts:
The truth is this is a one and done Fed rate hike. Janet Yellen even made the comment which no one but me will concentrate on in that she said they would have to do something if “global deflationary pressures” existed.
Steve Liesman has gone on to change his mind about rate increases from 3 to now “0-4” increases for 2016. I haven’t changed my mind: I still believe the answer is zero rate increases in 2016 and a definite possibility of more QE ala Europe and Japan and the PBOC. As for the Fed, they believe they are still on a “gradual” rate path. But no rate increase in March. This delay in increases could, in part, be attributed to the fact that the U.S. stock market began 2016 with the worst start ever.
Doug, What About Your 8 Indicators That Tell Where Gold Will Go Next?
Anyone who has followed me knows I happily share what I see so we can keep each other in check. The big picture hasn’t changed recently, as you’ll see in the chart at the close. Here's how I called gold this year, from my nightly, subscriber only report:
- 1/24 SPDR Gold Shares (N:GLD) signaled green on the daily
- 1/26 iShares Silver (N:SLV) and VelocityShares 3x Long Silver linked to S&P GSCI Silver ER Exp 14 Oct 2031 (O:USLV) signaled green on the daily and I putDirexion Daily Gold Miners Bull 3X Shares (N:NUGT), Direxion Daily Junior Gold Miners Bull 3X Shares (N:JNUG) and Market Vectors Junior Gold Miners (N:GDXJ) on the one to watch list
- 1/31 SLV and USLV signaled red on the daily (my Trading Rules say you can take profit anytime you want and don’t have to wait for signals).
- 2/1 Market Vectors Gold Miners (N:GDX) turned green on the daily
- 2/4 GLD and GDX turned green on the monthly, SLV, USLV, NUGT, GDXJ turned green on the weekly
- 2/7 NUGT, JNUG, GDXJ turned green on the monthly
Here is a quick update on my 8 indicators that tell us where gold might go next. You can see that some of them might have given you reason to invest in gold, with or without my guidance. I originally wrote that article in early August 2014 and the indicators have remained pretty strongly on trend.
- Demand from buyers: it has picked up some but nowhere near what it was at the last two bottoms.
- Stock market: was falling and investors looked for alternatives which they found in gold and gold miners.
- VIX: passed 20 and began showing fear, something I said was the “missing ingredient” in a past article.
- Europe fighting deflation – they still are.
- Dollar: turned from bull to short term bear as you saw above.
- Velocity of Money: still pushing on a string – deflation.
- Commodity prices: had a little move up here. oil still weak. CRB Index at resistance levels.
- 10-Year Treasury: was 2.55% in August 2014 and is 1.75% now.
So where are we going?
Many of you know that I have been in the deflation camp for a long time and that this would put pressure on gold and silver prices. So far it has, and a blip up in prices hasn’t changed the overall analysis of what I see coming on the horizon. All I try to do is put the pieces of the puzzle together and show you the work and hopefully you can make good decisions based on what you read. You as an investor don’t need someone to tell you what to do, but my advice over and over hasn’t been bad; dollar cost average into a position in physical metals. Some may be investing in SPDR Gold Trust ETF (GLD) or iShares Silver Trust ETF (N:SLV) or the like because they can’t buy the physical metal.
If you are buying metals today, here's the one analogy I continue to bring up. If you would have invested in the Dow when it first hit 8500 you would have been upset once it moved to 7500. But the investors who got in at 7500 and 8500 were not complaining when the Dow hit 18,000. Chances are they didn’t sell either and were still holding, even with the Dow at 16,000. The point is, with gold and silver, treat them like it’s 2009 and invest accordingly. Chances are we won’t hit the exact bottom or those waiting for my “all in” call may not see my predictions come to fruition.
Dollar cost averaging into your allocation is the best advice I think anyone could give. You naturally have to assume that gold will fly from these levels, or below. But if you want the best indicator of where gold will go, look no further than the dollar, for now. One may lead the other for a bit, but they always get back in sync.
For those looking for the big picture of what I think will happen with gold, I offer the following chart to sum things up. If you are invested in gold mining ETFs (or the individual miners) like Market Vectors Gold Miners ETF (N:GDX), Market Vectors Junior Gold Miners ETF (N:GDXJ), Direxion Daily Gold Miners Index Bull 3x Shares ETF (NUGT) or Direxion Daily Junior Gold Miners Index Bull 3x Shares ETF (JNUG), make sure you have stops in place.
If I am right about the coming deflationary contraction, it won’t be pretty for most assets. I don’t mind if someone puts their funds in cash, for instance PowerShares DB USD Bull ETF (PowerShares DB US Dollar Bullish (N:UUP)), or iShares 20+ Year Treasury Bond ETF (N:TLT) in the meantime.
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All trades, patterns, charts, systems, etc. discussed in this outlook and the product materials are for illustrative purposes only and not to be construed as specific advisory recommendations. All ideas and material presented are entirely those of the author.