Originally published by Chamber of Merchants
It’s been an eventful week full of data, drama and dollar decay. I’m going to aim to stay on point: I’ve invested in Gold and Silver miners, so everything I discuss will be related to the outlook for precious metals. Let me tell you, I’m more excited than ever.
Elections
Let’s get through the drama first: election fever.
While Hillary Clinton was leading for a majority of the presidential campaign, the latest polls indicate that the race is becoming ever tighter. Additionally, Hillary Clinton’s lead has been handicapped by the FBI email scandal as well as revelations from Julian Assange’s Wikileaks regarding ISIS. The Wikileaks founder has however stated in an exclusive interview that Donald Trump will not be “allowed” to win by the establishment.
The result has been palpable: the US stock market has suffered its longest losing streak since the 2008 Global Financial Crisis, suffering a straight 10 days of closing in the negative. Europe and Asia have suffered similar withdrawal of funds as investors and fund managers wait for an election outcome.
Gold meanwhile has experienced a resurgence as trading occurred mainly around the $1290-$1305 range. As I type this, gold is breaking out of its range edging near $1306.
The general consensus is that a Hillary win will be more of the same, meaning we start to immediately focus on the Fed and its rate hike decision for December. (The numbers are in and a rate hike is far less likely, believe me)
On the other hand, a Trump victory is largely expected to create uncertainty which is as good as bad news for the market. That means weeks of policy uncertainty and severe market volatility as capital is moved around to compensate.
As a Merchant I am satisfied with either candidate from a portfolio perspective. There is a flawed view that gold is appreciating solely due to election “jitters”. This is incorrect. While there is a portion of traders that are hedging against or betting on a Trump victory, gold’s overall accumulation over the past 5 weeks signals a bigger picture trend that stretches far beyond the elections.
You see, the smart money, the banks, are not day traders. They are trend makers. And the trend in gold is clear while the outlook for the world’s largest economy fails to impress or improve.
“We were promised 4 rate hikes for 2016 … we’re still waiting.”
A Worsening Economy, So Let’s Raise Rates
Non Farm Payrolls disappointed.
Manufacturing Payrolls was almost 100% lower than expected
See below:
So everyone knows , they’re raising rates in December, right? Well hang on.
We were promised 4 rate hikes for 2016. It’s November now and we’re still waiting.
Maybe they’ll hike 100 basis points to make up for their tardiness instead of the 0.25 percent hike which is anticipated.
No.
So why has the Federal Reserve failed to deliver on their promise of 4 rate rises? Wow. What a topic. Too broad for a single Weekend Report.
But let’s summarise by saying that as Janet Yellen waits for more positive economic data such as unemployment, jobless rates, wage rates, inflation, consumer sentiment and GDP ( barring the Soya Bean Miracle) to finally raise rates, the indicators get worse and worse instead of better.
In fact, the team at Zerohedge points out that the statistic for the average American worker holding multiple jobs is at the highest it’s been for a century. That is 100 years.
Essentially it means that for whatever reason,(choice is definitely not one of them), the average American now has to have several jobs to get by. And they they’re not full time jobs, they’re part time: waitering and bar tendering are increasing while manufacturing and well paid jobs are lost.
Does that sound like a booming economy that needs to be slowed down with higher interest rates? Does that sound like an economy that should basically tax its people with higher mortgages, more expensive rent with a rate hike?
Doesn’t sound like it to me. But, unfortunately, inflation does appear to be rising, which means that the average American who is already struggling is going to be paying higher prices for his every day expenses. Essentially the average American is becoming poorer due to almost no growth in wages while the prices they pay for everyday expenses are increasing.
Raising rates? I don’t think so. And if they do raise rates, they will need to cut rates soon after as a consolation and throw in a truck load of cash with easing while they’re at it to say sorry to the American people as they head into a powerful and unforgiving recession in the United States, which the rate rise accelerated in the first place.
The Case for Gold Beyond the Elections:
A quick note on Crude Oil:
I was right about crude oil more than a month ago, that was while other traders were betting on an imminent $60 a barrel. We just suffered the biggest decline in 9 months. But it’s ok. Everyone will grab the bottom again for the trade into December’s OPEC meeting on the hope that the OPEC oil barons will play nice with each other and and agree to make less money by producing less oil. As a Merchant, that is not considered to be a high probability trade. As I said before, entering low is fine, but don’t drink the sludgy cool-aid. Get in and get out before the coin toss occurs. I also recently read a report that stated the demand for crude oil will be reduced in 2017 due to slowing global growth.
No thank you. I’ll stick with Gold for now.
Gold | 5th & 6th November 2016
The economy is worsening yet the Fed threatens to raise rates. The market is terrified at the prospect of a rate hike since it is nonsensical to tighten and contract the economy with higher interest rates while the economy is already, uncontrollably, contracting. Gold will be an accumulated hedge against the market fallout from a rate hike which is also very likely to accelerate a recession and trigger a market sell-off. ( The Fed and Janet Yellen know this, hence they are ALSO terrified of raising rates. Don’t believe me? We were promised 4 rates hikes this year, we have received… drum roll… ZERO… make sense?)
The economy is suffering from low growth and the case for U.S consumer is looking more dire than ever. As the economy starts to show signs of an early heart attack, the Federal Reserve should deliver the only remedy it is familiar with: Quantitative Easing: Stimulus: Money Printing: Debt. See the debt blowout in the last decade:
These are the same factors that caused a rally for gold to $1900 over a four year period. Except this time Gold is going to start from $1300-$1500, not the from $850 level from days of old. Hence, gold has a good case for $1900+ over the next 2-4 years. (However, if the US economy shows signs of good growth , low unemployment, and reasonable inflation then the emergency stops are not necessary and Gold will find an equilibrium range. That is a VERY big IF and I don’t to subscribe to that outcome due to the current set of economic trends. ) See below for U.S Govt debt vs Gold Price:
The ONLY reason gold started a bear market in 2011, is because the Federal Reserve announced a winding down of their bond purchases, higher interest rates and an end to the monetary easing.
Well, they have not even begun to sell the bonds off which was meant to occur prior to an interest rate normalisation. Know why? They’ll crash the bond market. And after 4 years, where are interest rates? 0.25% .
So, if we’re going to get more of the same with quantitative easing to try spur growth in the economy combined with low interest rates, we can expect a repeat of 2009-2012.
Remember, you can print money. You can’t print gold. Therefore if more dollars are going to be injected into the system, on debt, then the price of Gold must appreciate. A post for another time.
Short term expectations
I expect Gold to have a rally into the elections. However, if Hillary wins then that gain, wherever it is, $1320-1350, will likely pull back until we refocus on the real economy into December .
On the other hand, a Trump victory will be a bonus for the gold price, but it is not essential for the overall case for Gold.
Regardless a major expectation has been priced into the the U.S. Dollar for a December rate hike: 78% probability consensus.
What happens once December arrives? If the interest rate gets hiked then it will already be in the price, meaning a sell-off will commence in the U.S. Dollar since it will be at least another year before the next one. This is good for gold.
On the other hand, if they don’t raise rates, it will trigger a panic sell-off in the dollar as the Fed loses credibility for postponing yet another hike. The economic numbers will continue to get worse and the rate hike uncertainty will wreck the markets . This is good for gold.
Meanwhile the gold producers in my portfolio continue to become more profitable, continuing to release excellent results and continuing increase in earning’s potential.
Sure, this week we have seen a glimmer of a rebound in most of them ( Friday’s close was in the negative due to an overall funds withdrawal), but once the funds return to the market after the election, I believe the bulk of it will be rotated into sectors that will outperform next year and in my opinion, precious metals will be one of those sectors.
Those who keep a cool head will be extremely profitable. Those who dart in and out, uncertain of the big picture, will churn their accounts and not make the returns that the bull run is going to produce.
Don’t be frustrated. Be patient.