Originally published by Chamber of Merchants
The Merchant stood at the foot of the Sphinx. The heat of the creature’s primordial breath, overpowering even the desert’s own gusty emanations, made the Merchant’s humble attire all the more uncomfortable. Beads of sweat, almost as a consolation, evaporated from the man’s forehead as the Phoenix bellowed his thundering riddle:
“Which way is up, which way is down?
Be it the pauper or the king that bears the crown?
Is the crown hollow or heavy to hold?
What shall it be made of,
Paper or Gold?”
The Riddle
We have ourselves a puzzle to piece together. Piecing the puzzle together will allow us to achieve another round of profits of possibly spectacular proportions. However, if we’re missing some pieces of the puzzle, we will likely miss out or give back the gains we achieved.
The pieces of those puzzle, with regard to my portfolio (when I get back in) are:
- Price of Gold USD (POG)
- The US Dollar
- The Exchange rate between the Australian and U.S Dollar AUD/USD
- Price of Gold AUD (POGAU)
- The Bond Market (U.S mainly, But domestically too)
I’ll discuss these briefly to explain the factors that I am considering.
I will then conclude with what I intend on doing and why.
Moving on…
The gold miners from the United States are in a binary trade right now. There is only up, there is only down. If the US dollar drops, their gold price sky rockets. If the dollar bounces, then the USD gold price will retrace to support.
However, for myself, I trade the Australian commodities sector. Currently I’m focusing on the precious metals end of the ASX neighbourhood. I have many times espoused the virtues of the exchange rate buffer for safety’s sake: even if the dollar rallies further, then the the exchange rate will keep the Australian gold price around $1600-$1650. The only issue is that instead of a buffer, the exchange is starting to function as a barrier in the last 6 days or so, preventing the AUD gold price from appreciating. This is giving gold miners the necessary space for what has been, so far, a very minor correction.
Currently the AUD gold price rests at $1596 AUD.
This is slightly lower than where we were Friday which may cause some market participants to panic and sell off on Monday morning, especially with the threat of a reversing gold rally.
I exited my stocks within 5% of the peak and have watched the momentum and price recede across the board. I would like to see a deeper correction come Monday, however, if it happens it may be temporary.
So what is happening?
Well currently, it almost makes no difference if the price of gold increases or decreases, the AUD gold price is staying stagnant. If this continues, miners would give back their excessive gains and find a new equilibrium at support.
However, a break above $1207 would very easily cause a one day rally of $30-$60 in the USD price of gold (over and above the movement in the dollar) which, if the exchange remains roughly the same, would return the AUD gold price to around $1650-$1700.
In that event, we would naturally see a repeated rally in the miners to even higher levels.
As a trader in Australian gold stocks, I would want the Australian dollar to decline relative to the US dollar, while I would want gold to appreciate relative to the US dollar.
We can only get that if
a) The Australian dollar loses its appeal through poor economic data
b) If the US dollar declines enough to create a squeeze around $1207 which would push prices close to $1240-$1280 within a day or so of crossing the threshhold.
Let’s quickly see about the US dollar…
The US dollar has been rallying, although it is quite clear that funds have been moving out of the US dollar for some time now. I have shown that time and again in my previous posts.
If we extrapolate the US dollar based on only economic data, then the US dollar should continue its decline and POG will shortly rally past the $1207 mark.
Recent economic data has been mixed from the US but some major ones have been disappointing such as core retail sales which came in below estimates.
However, there may be a push on the dollar if President Elect Donald Trump tweets something that is pro-market/pro-dollar. Any policies that would strengthen (or at least suggest to) improve the US economy, it will be bullish for the US dollar.
We are also seeing signs of inflation pick up, which is being under reported since they revised the measurement of inflation around 2011. Crude Oil is double the low of last year which was around $26 from memory. This is bound to show up in costs and final prices of business activities across the board. If inflation continues to rise, we may see the market positioning in expectation of the Fed raising rates to curb inflation.
The issue here is, the indicators for growth are stagnating or are negative. This means that inflation is showing up but growth is not…. aka Stagflation. If this trend continues, then gold has a date with $1500+ USD because the Fed will not raise rates in a slowing economy. They’d rather allow higher inflation in the hope of spurring growth (which is laughable).
So if the current reporting trend continues, gold will not only confirm its bull market trend, but it will become intensely profitable to invest in anything gold / silver related over the next year/3 years.
Australian Dollar
If the dollar and gold continue to move in tandem, then we really need to consider the breakout factor, the Australian dollar which will determine the profitability of Australian miners’ exports.
The rally has lasted for a week now on the premise of US dollar weakness. However, does the Australian dollar have the fundamentals to remain this high or even higher?
This week, we’ll see several indicators for Australia and China which will determine the trend for the Australian dollar.
Monday’s inflation indicator will have minimal effect, but Tuesday and Thursday will reveal motor sales and home loans. If those numbers disappoint (which I think they will) the market will start to realise that the next RBA interest rate will have to be a cut (they should have cut weeks ago).
Additionally, if the vitals of the economy in Australia start to wane, one could expect a lack of confidence in all things Australian with regard to business and consumer confidence.
I expect the the Australian dollar to lose it’s lustre this week, which, all things being equal, should be good for our miners. The miners have partially lost some momentum on the Aussie strength, however, come the end of the week I place a high probability on the AUD being weaker in comparison to US dollar, regardless of the strength or weakness of the US Dollar Index itself.
Additionally, China’s GDP and retail figures, if reporting weak will help the AUD down the hill. I cannot tell whether China’s numbers will be good or bad. I believe they should be weak, but one never knows. Volatile weak for sure for the AUD.
Bonds
The world has itself a little problem on the horizon if this continues…
You see, in the above bond yield chart, it appears that the yields have rebounded, meaning the bond market may not be very healthy. If the yield does in fact rebound, then it means that the financial market and all the credit in the world related to the USA will become untenable. This included mortgages etc…
What I’m saying, is that if the bond market tanks with sky rocketing yields, we’re looking at another financial crises. The Fed, which is threatened by Trump’s presidency is the only entity that has kept the bond market in tact. In addition, they’re the only entity which has been keeping a full blown crisis, which we should have had in 2008, at bay.
If this scenario plays out, don’t expect it to be advertised in the media until it’s too late. Keep your eye on bond yields.
If this happens, gold and silver will be the only life raft trade. Alternatively one could start shorting everything finance related.
Is this the case right now? No. We’re not there yet… But I have an inkling that there is an issue looming and the general stock market will certainly not be remaining near record highs if bond yields continue to rise.
Conclusion
I expect weakness in the miners this week. If that weakness shows itself, I will be entering my positions which I expect around Tuesday/Wednesday this week. Monday the US market is closed, which means there will be low volume commodities trading. Additionally, there are gold options expiry on the 20th Jan (Trumps inauguration day) which very often causes some weakness in the gold market, temporarily.
If traders run away from precious metals miners this week, they’ll be passing me by as I re-establish my positions.
If gold continues its rally with a weakening AUD prematurely, I will enter my positions on momentum.
Adapt or die.