Originally published by Chamber of Merchants
I would be a liar if I said I knew that the dollar AND Gold were going to rally together.
I’ll share some economic insight with you on what happened, however, one thing is for certain : The trend for gold appears to be cemented, and it’s up.
No uncertainty there.
I’ll just go ahead and speak my mind, not beating around the bush with metaphors. (Ok, I might use some.)
Die Dollar, Die.
The U.S Dollar has been like a menacing villain from a James Bond film that apparently dies, but somehow manages to reappear later, causing mayhem all over again. Yet, bound to die. [It’s Halloween season: I should have used a Jason metaphor… Next time.]
So the Dollar gets the worst news: Jobless rates increased, jobless claims increased and previous months were revised to reflect even worse conditions. Then, the green backed freak decided to rally.
Market Madness Indeed
Why is the dollar rallying even though the economic numbers are poor? Why is the Euro falling? Why is Gold rallying simultaneously? Shouldn’t it be falling?!
This is the Chamber of Merchants. Here we seek clarity behind the veil.
I’m not here to produce cornflake articles: articles that you read daily, usually in the morning, but that have very little nutritional value.
If we understand, we can plan.
So here goes…
Draghi Melts Euro Before Yellen Disappoints with No Rate Hike
Did you know they’re both central bankers? Janet Yellen and Mario Draghi happen to be in the same line of work and both of them, together with Central Bankers of Japan, need to regulate currency flows, economic growth & debt levels etc across the Western world. And it’s going swell.
The Euro has been falling out of the sky. I mentioned that in my previous article which, I am humbled to say, was Editors Pick at investing.com. Simultaneously the U.S Dollar has been , powering through terribly weak economic data which I mentioned should cause a lack of confidence in the U.S Dollar. However, Mario Draghi, the European Central Bank President, did not impress with his speech regarding monetary policy. His speech sent the Euro hurtling to 6 month lows. Mario’s speech has been more effective in depreciating the Euro than cutting interest rates into negative territory.
Let’s all agree on something here:
If the Euro gets too strong, it hurts all exports from the European Union. Additionally it sends a larger portion of capital overseas, since you can buy parts, products and service cheaper. The European Union would like to avoid losing growth and capital to other economies, so a lower Euro is a good thing for Europe. A stronger Euro is bad (for the Current Account)
( At least according to the current outlook.)
It’s been Mario Draghi’s challenge to try keep the Euro low while trying to spur inflation and growth across the Euro zone. Japan has the same problem, but they happen to have earthquakes or North Korean displays of power, or both, whenever the Yen gets too strong.
The major problem for Europe is that if the U.S Fed does not raise interest rates, it will erode dollar strength and push up the Euro.
Given the weak economic data from the United Stated, I believe the probability is high that the Fed may not raise rates in December. This would to send the Dollar tanking and the basket of currencies against which it is measured will appreciate relatively. However, since the Euro would be starting a climb from a low level, it won’t be as painful for Draghi’s currency.
Ultimately, I am suggesting that Mario Draghi’s nonchalance was by design to send the Euro into uncertainty. Meanwhile the globe accepts that the U.S.A is about to up their rates.
Negative Interest Rates
See, the European Union offers negative interest rates on cash. So you’re essentially losing money in the bank. On the other hand, the U.S.A has been threatening for years to raise its rates, so the disparity is widening between the zones.
The U.S.A is looking more attractive for capital flows given the intention of raising rates.
Why is Australia’s exchange rate so strong? It’s because the RBA offers a cash rate of 1.5%.
In comparison the USA offered 0% for years and is now offering 0.25%. The market expects 0.5% in December.
We’ll see.
Gold | 22nd October 2016
So interestingly, gold broke its negative coupling to some extent with the U.S Dollar. It happened while I watched the Dollar Index break past roughly 98.4. At that time gold was priced at $1262. As the U.S Dollar rose higher, Gold turned around and started heading in the same direction. Gold is now at $1267 +-.
I think this may be due largely to hedging, where the Dollar has reached perhaps, unsustainable highs, the Euro is experiencing exaggerated lows, and the whole thing may come tumbling down. The best way to hedge against a reversal is by placing part of your portfolio in gold. If you’ve placed half your capital in the U.S Dollar, placing the other half in Gold would protect you against the U.S Dollar reversal to the downside.
Tears for Fears
When the Australian Stock Exchange closed, Gold was trading around $1262-$1264. The traders who bought into the miners the day prior ended up selling to an extent as Gold threatened to re-enter the $1250’s, or so it seemed at least.
My opinion is that zipping in and out is going to create far more damage than good to a portfolio.
A Merchant does not try to optimise every single movement in his commodity’s price.
Trading on paper from an historical chart in retrospect is simple and misleadingly easy.
Real-time trading, zipping in and out, is an entirely different ball game and difficult to profit from:
So it’s not part of the Merchant Method.
Rather, a Merchant enjoys a quality of life without excess stress and anxiety while focusing on the big picture and bigger move.
The bigger move, the really profitable trade, will materialise and the Merchant will sell into that. These large and aggressive moves often happen without notice and usually leave retail traders in the dust, scrambling to regain positions.
The Merchant Method focuses on 16 to 50 transactions a year, give or take.
The closing transactions average 20% to 50% return. This is across a spread of 3-6 equities.
I expect Gold to push to levels higher than $1377 shortly, and I am positioned accordingly.
This marks the end of this weekend’s report.