Originally published by Chamber of Merchants
Good morning. I’m glad to share some views on what I see in Gold’s price action and how the the latest U.S. Fed comments from Janet Yellen affects the trend in Gold.
Gold Price Action | 15th-16th October 2016
Gold has experienced significant support around the $1250 mark. Fundamentally and economically I expect an aggressive bounce. In fact, as I explained a few posts ago, the bounce should be now[although large contract sells have been executed each time gold gets near $1260]. On Thursday the economic numbers came in pretty weak from the U.S.
The JOLTS report showed that far fewer than expected jobs were being advertised.
Now remember, when the unemployment rate rose to 5% earlier this month, they media headline was that “people were coming back into the workforce[increased participation rate] because they are feeling positive” .
No. I see a different picture.
You see, if things are getting worse leading up to the election, the government can’t say it’s getting worse. That would not be politically beneficial.
Rather, there are different ways of interpreting data and the general theme is that “things are so much better now”. This means that if the unemployment rate increases it probably means that people who originally stopped looking for work are now confident enough in the economy and start looking for work again.
High school economics textbook stuff. Honestly.
Let me paint a different scenario:
I see more people entering the job seeking pool because they have run out of options.
If there is a household and one person in the household was working and their income was sufficient then that would be fine. However, if that person’s income took a hit, or if they cannot find enough part time work, it would force another member of that household to go look for employment. So the participation rate is increasing, but is this a good thing? No. To me this shows that the average household in America is struggling and that more strain is being placed on the consumer. And this is why I am probably correct:
“I’m worried about my job, my future, my mortgage, my family”.
Consumer Confidence & Sentiment has Hit 1 year lows
Why am I discussing all of this? Because it has everything to do with interest rates, inflation and the price of Gold.
So keep up if you want to educate yourself.
The Federal Reserve is obsessed with the consumer, that is, the person on the street spending money. In a consumption based economy, the consumer is everything . (It shouldn’t be: productivity should be everything, but I’m not running the globe, so go figure).
If consumers have low expectations and consumer sentiment is low, then it means that there is something wrong. The people on the ground are saying “I’m worried about my job, my future, my mortgage, my family”.
Janet Yellen, the Fed Chair, is the person with the most financial clout in the world. In a speech last night, she said that the they may need to stimulate the economy much more and even let it run hot with “high-pressure policy.”
So what does all of this mean for the gold shares I own?
As I stated in my previous post, the U.S.A will need to keep interest rates lower for longer and perhaps even launch QE4, that is, print more money. In fact that is what Janet Yellen is saying in her speech. They’ll need to do further easing which means printing billions of dollars and injecting it into the economy.
And interest rates?
While November and December are “live”, I can assure you that raising interest rates will scare the heck out of everyone, including Janet Yellen. That is because raising interest rates cools down an economy. You can’t have both: you can’t raise interest rates and want to stimulate the economy. They work in opposite directions. In other words, you can’t want to prepare for a big night out buy taking sleeping pills. Interest rates are the sleeping pills, but the Fed wants the economy to party all night. So they can barely raise rates without bringing the economy down. This conundrum is great for gold.
In the chart I have plotted U.S Government Debt against price of Gold. As money gets printed, Gold becomes more valuable. This is because you can print money but you can’t print gold. It’s more complicated than that but this is just a weekend report, not a Weekend Economics Retreat [no, I don’t offer weekend retreats, so please don’t email me about a weekend retreat].
Wrapping it up
Believe me, all the above I could have said in one sentence, but I explain it in detail so that you can learn to identify for yourself where we are at in the greater scheme of things. All the above is the foundation of why I, as a Merchant, believe that Gold and all the Australian gold and Silver miners are in a bull market. In a bull market I can buy the lows, exit on the highs and buy the dip again, because the trend is up for the foreseeable future. In 6-18 months it may be the same for crude oil, but currently my focus is on Gold because that is where the greatest opportunity lies.
Conclusion
I am not a soothsayer and my clairvoyance is limited, so I cannot give an exact day the gold price will bounce. I’m expecting it now, as in the next day or two. However, there are banks involved in currency wars which manipulate flows of money across the globe and I don’t know when Goldman Sachs (NYSE:GS) or like will intervene here or there. However, Gold is oversold, and the RSI is looking more and more positive:
Gold’s RSI is Bullish
So my position remains the same for my portfolio. I’m in until Gold becomes overbought in the coming weeks/months.
Have a peaceful, safe and memorable weekend.