What’s Happening With Gold?

Here’s 3 reasons why gold has stumbled and drifted lower over the past week or so. Plus you’ll see how the US central bank, the Federal Reserve, is getting set to launch a “kamikaze mission” against the U.S. economy. 

Then Jim Rickards shows you why gold has proven so resilient this year, despite strong head winds from the Fed…

What’s Happening With Gold?

By James Rickards

Originally published at The Daily Reckoning

Gold was trading at $1,295 Wednesday before yesterday’s slip lowered the price to about $1,280. It’s down another $10 today.

Why the sell-off?

A couple of things. First, the political situation stabilized. Former FBI director James Comey’s much anticipated congressional testimony wasn’t the bombshell Trump’s opponents wanted, and now impeachment is off the table.

Second, the European Central Bank indicated that it could soon begin monetary tightening by raising interest rates or easing back on its bond buying, which is a form of tightening.

I should also mention that $4 billion of gold futures were dumped on the market yesterday morning, which sent prices lower. That also indicates how the paper gold market is subject to manipulation, which I’ve written about before.

But I expect this to be a short-term move. And I fully expect gold to resume its upward trajectory from here.

Nothing is for certain, but the march toward $1,300/oz and higher is still on track.

We could still see that level sometime this month. At that point, the gold market will have recovered all of the losses that immediately followed the election of Donald Trump, on Nov. 8. With this round trip from $1,300/oz to $1,128/oz and back again completed, the gold market will be poised for further gains.

This dip and recovery reflect several factors. The dip from Nov. 8 – Dec. 15 was based on Trump euphoria. With tax cuts, health care reform, infrastructure spending and reduced regulation on the way, analysts expected solid real growth. Investors sold gold and bought stocks, and the rest is history.

Then reality intruded. None of Trump’s programs has been enacted, and the prospects for all of them are cloudy at best. Health care is stuck in the Senate, tax reform is stuck in the House and there’s no money for infrastructure.

There are only 28 working days for Congress between now and the August recess. (“August recess” is a misnomer, because Congress actually takes close to two months off, not one.)

Much of the current session of Congress will be consumed with hearings on Russia, confirmation of a new FBI director and wrangling over the debt ceiling extension and budget priorities. That does not leave a lot of time for the substantive stuff Trump wants to accomplish.

Throw in war drums from North Korea, bellicosity toward Iran, terrorism in Europe and rising tension in the South China Sea. It’s no surprise gold has a bid driven by economic uncertainty and a desire for geopolitical safe havens.

Then we have our friends at the Fed. They are continuing on their kamikaze mission of raising interest rates into weakness. Next Wednesday, June 14, will be D-Day. On that day, the Fed will both raise rates and outline a plan to reduce the base money supply under the banner of “balance sheet normalization,” also known as quantitative tightening, or QT.

You can think of QT as the evil twin of QE (quantitative easing). QE is a substitute for rate cuts, and QT is a substitute for rate hikes. The Fed is putting the entire easy-money episode of 2007–2015 in reverse with a double-barreled blast of tightening through rates and the money supply channel.

Normally, tight money is bad for the dollar price of gold but not this time. That’s because the Fed is not tightening into economic strength, but they’re tightening into economic weakness for the first time since 1937. We can see this in last week’s data. Job growth slowed, labor force participation dropped, inflation dropped, auto sales declined and real wages continued to flat-line.

Gold sees what’s coming next, which is either a recession or something close to it by the late summer.

At that point, the Fed will have to reverse course. They’ll do this through “forward guidance” that signals there will be no rate hike in September.

We got a glimpse of this on May 30 in a speech by Lael Brainard, one of the “Big Four” in the Fed system, along with Yellen, Fischer and Dudley. Brainard said, in effect, that she is a “yes” for a rate hike in June but may be a “no” in September. She won’t be alone.

Brainard is a channel for Bob Rubin, the shadow godfather of the international monetary elite. If Bob Rubin, Christine Lagarde, Larry Summers and others gang up on Yellen as they did in September 2015 (when Yellen postponed the “liftoff”), then September 2017 is off the table for a rate hike.

Gold sees this coming.

Gold is the most forward looking of all major markets. With a $1,300 foundation in place and forward guidance in the cards, gold could have an extremely strong second half of 2017.

The time to invest in gold and gold miners is right now, while the entry point is still relatively attractive. In fact, this recent pullback might be the best opportunity to acquire gold cheaply that we’ll see for a very long time.

Below, I show you more proof that gold is set to take off once again, despite all the head winds it faces. What do real interest rates say about gold’s next move? Read on.


Jim Rickards
for The Daily Reckoning


Gold Overcomes Fed’s Head Winds

Gold has moved in stages from the post-election low of $1,128 per ounce on Dec. 15, 2016 to its current level just under $1,270 per ounce. Even with gold’s two-day sell-off, that’s a solid 12% gain in the seven months since the election.

I see this temporary drop as a prime opportunity to buy gold cheaply. We might not see gold prices this cheap again for a very long time.

Gold’s solid performance this year was fueled in part by geopolitical concerns surrounding April’s Syria missile attack by the U.S. and rising tensions in North Korea. Neither of these situations will be resolved soon, and both have the ability to escalate into war for the United States. Geopolitics will continue to keep a floor under gold prices.

That said, what’s most impressive about gold’s multi-month rally is that the macro environment has not been particularly good. The Fed raised rates on March 15, and has been preparing markets for another rate hike next week, on June 14.

Despite last week’s lackluster unemployment report, the path toward higher rates is set in stone. The only debate is whether there will be two or three more rate hikes this year, but most do not expect a pause of any length.

Fed tightening has supported a strong dollar, which is typically a head wind for the dollar price of gold. If you think of gold and the dollar as two forms of money, which I do, then it’s unusual for both to be getting stronger at the same time.

But that’s exactly what’s happening.

And therein lies a mystery. Increases in the fed funds rate, controlled by the Federal Reserve, are supposed to be negative for the dollar price of gold. After all, gold has no yield and competes with interest-bearing investments that do.

When interest rates go up, that yield comparison looks worse for gold and is supposed to result in lower gold prices. Instead, gold has been rising along with interest rates. What gives?

In fact, the conventional wisdom about higher rates being bad for gold is incorrect. The correlation between the dollar price of gold and the fed funds rate is quite low. Those expecting gold prices to fall on higher rates are missing one very important element.

Those analysts are focused on nominal interest rates.

That’s the wrong benchmark. The key is to focus on real interest rates, which are computed by subtracting inflation from the nominal rate. Inflation has been rising lately. When that inflation is subtracted from nominal interest rates, it turns out that real rates are going down, not up. It’s those lower real interest rates that are providing a boost to gold prices.

With gold rising in a difficult environment, imagine how much more it will surge if the Fed moves to an easing policy.

And that’s exactly what I expect.

One more Fed rate hike might be the last nail in the coffin for the U.S. economic expansion that began in June 2009. The U.S. economy is already weak. And first quarter GDP came in at only 1.2%.

This expansion is already one of the longest on record, 94 months long. The average expansion since 1980, a period of long expansions, is 80 months. Clearly the economy is living on borrowed time as well as borrowed money.

The important thing to realize is that the Fed’s raising rates for the wrong reasons. It’s not raising rates because the economy is stronger. It’s raising rate in the face of weakness and it’s going to make that weakness worse.

In the short run we can expect higher rates and a slightly stronger dollar. But when the economy hits stall speed, which I expect later this summer, we might also see a big stock market correction.

That’s highly likely because the stock market’s been priced to perfection based on expectations about Trump’s policies, many of which are hitting the wall.

We’re not going to get the tax reform the markets want, or at least not anytime soon. Nor can we expect the type of infrastructure spending the market’s priced in for the foreseeable future. Trump’s making more headway on regulatory reform, but that takes a long time to have an effect.

I haven’t even mentioned the health care fiasco. It’s not clear how that’s going to be resolved, if at all.

And beyond the distractions Trump has to contend with over Syria, China and North Korea, the issue of the Russian hacking is still out there. We could see hearings to get to the bottom of it all, which chews into the calendar.

So it doesn’t look like we’ll be seeing a lot of progress on the economic front anytime soon. And there are signs that growth is already stalling.

When the Fed eases after next week’s hike to resuscitate the economy, gold should soar on the news.

Then we have to consider the global factors that are driving the gold price.

Rising geopolitical tensions are an obvious factor, as mentioned. And nations like Russia and China have been buying lots of gold.

But that’s not all. The dollar’s been strong, based on the global dollar shortage combined with the Fed’s tightening. In China, citizens and companies are desperate for dollars to get their money out of the country before the China credit bubble explodes.

Other emerging markets countries are also scrounging for dollars to pay off their dollar-denominated corporate debt before the dollar gets even stronger and U.S. rates go up.

Normally dollar strength means a lower dollar price for gold. But, gold is responding to its own dynamic based on supply and demand. The same Chinese who are desperate for dollars are also desperate for gold. They need a store of wealth other than stocks, real estate, and bank deposits to weather the financial storm they know is coming.

Those who are stuck in China and can’t get their money out can at least buy physical gold and move to the sidelines before the credit storm strikes. Mining output is flat lining just as refinery demand is spiking so that puts upward pressure on the gold price as well.

But there’s another powerful factor boosting gold prices. That’s the shortage of physical supply relative to demand in the wholesale market.

For now, gold continues to rise based on a combination of higher inflation, geopolitical concerns and tightness in supply. We see no change in this landscape in the near term.

The message here is that, while gold is up, it’s not too late to jump on the bandwagon. This rally has legs.

Gold miners should do even better than physical gold because of the internal leverage in mining stocks. They can rise much faster than the physical gold price, often dramatically so.


Jim Rickards
for The Daily Reckoning

James G. Rickards is the editor of Strategic Intelligence. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money.

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