Gold’s been on a rollercoaster ride this year.
The yellow metal skyrocketed, peaking at US$1,303.62 per ounce in May. But despite the ‘gigantic’ rally, it didn’t last. The precious metal crashed below US$1,200 per ounce last week.
It’s good news one day and bad news the next.
Mainstream analysts aren’t concerned. They believe that the worst is over. Daniel Hynes — ANZ Banking Group’s chief commodity strategist — told the Sydney Morning Herald:
‘We’re past the worst in this cycle, but it will take time to improve, therefore some markets can be quick to sell-off on any pick-up.’
Paul Bloxham, HSBC’s chief economist, agrees. He told the Sydney Morning Herald, ‘Commodity prices are likely to have passed their trough in January and February. There is a moderate upward trend under way.’
I admire their optimism. But I’m not paid to be bullish. I’m paid to be a realist.
With this in mind, the local gold miners had a great run yesterday. Northern Star Resources [ASX:NST] rose 14.39% to $4.85 per share. Evolution Mining [ASX:EVN] jumped 13.43% to $2.28. And, Newcrest Mining [ASX:NCM] soared 11.64% to $22.06.
Will the run last? If you’ve been following my work, you know my answer.
The US Fed has lost all credibility
In a world hooked on the next central bank move, I expect gold to head lower. Of course, this isn’t exactly the most popular view.
I’m not worried. I realise that most people seek opinions that back up their own. It’s called confirmation bias. At the moment, the majority seek a bullish view on gold. But what if they’re wrong? It wouldn’t be the first time.
Oh, well. The world goes on…
Last week, gold surged more than 2% on Friday — the largest one day gain in nearly three months. It was after the release of dismal US nonfarm payrolls data, which signalled the Fed won’t raise rates any time soon. Investing.com reported:
‘The U.S. economy added just 38,000 jobs in May, the smallest gain since September 2010 and far below expectations for an increase of 164,000. The economy created 123,000 jobs in April, whose figure was revised from a previously gain of 160,000, the Labor Department said Friday.
It wasn’t the only bad number, which made it a great day for gold. Investing.com wrote,
‘Also Friday, the Institute of Supply Management said its non-manufacturing purchasing manager’s index fell to 52.9 last month from 55.7 in April. It was the weakest reading since February 2014. Analysts had expected the index to drop to 55.5.’
Looking at the numbers, you’d say the Fed won’t hike rates any time soon. Remember the ‘data dependent’ refrain? The message that’s so vague and overused that no one knows what it means.
Unfortunately, this the least ‘data dependent’ Fed we’ve had in history. They should have raised rates from 2013 onwards. They also had multiple chances to hike last year, but piked out.
Yet the US Fed Chairperson, Janet Yellen, needs to raise rates drastically. She knows it as well. Although she would never admit it, Yellen realises that another financial meltdown is inevitable. When it hits, Yellen needs higher rates to handle the crisis. Without it, the Fed is pretty much…well…useless.
It’s a double-edged sword…
Following the December rate hike, the US stock market saw its second decent correction in a matter of months. Of course, this scared the Fed, who became more dovish. As a result, Yellen signalled rates would rise gradually this year. The US dollar pulled back drastically on the news. Gold punters ate it up, with the precious metal flying through the roof.
The economic data isn’t great today. But the US stock market is nearing all-time highs. Moreover, international markets seem to have settled from earlier this year. If Yellen doesn’t raise rates, she will be blamed for causing a catastrophic stock market bubble. For this reason, Yellen is stuck between a rock and a hard place.
She is really behind the curve. What can she do?
I guess, stick the same rhetoric: ‘it depends on the data’.
In my view, the US Fed is likely to raise rates in the months ahead — it really has no other choice. When this happens, capital should flee into the US dollar, which won’t spell good news for gold.
A huge dollar rally is coming. And, although you probably wouldn’t know it from most commentary, it could start this month.
Don’t fight the US dollar
Vern Gowdie, Editor of The Gowdie Letter, wrote about the BREXIT referendum in yesterday’s Money Morning. He said:
‘The news in the UK is dominated by the Brexit referendum. There are two weeks to go — 23 June is polling day — and both sides are ramping up the campaign of misinformation.
‘If you believe the REMAIN camp, the economic world will come crashing down, trade with Europe will be that much harder, unemployment will rise, the British pound will cop a pounding (pardon the pun) and wages are going to suffer. Big business is campaigning strongly to remain in the Eurozone.
‘Whereas the LEAVE camp is about controlling who comes to the UK — many are referring to Australia’s immigration process as the model to adopt. The refugee crisis in Europe — with its spill over effect on the UK — is causing some people some serious concern.
‘Mario Draghi — the ECB head honcho — and his merry band of bankers have been pumping 80 billion euros A MONTH into an asset buying programme — government and corporate bonds — as well as pushing interest rates into the negative to generate a flat lining inflation number.
‘Enticing European corporates into borrowing more money at cheap rates to move the inflation numbers into the positive is hardly a strategy for sustained growth. The European household debt figures indicated individuals are not taking the cheap debt bait.
‘Take away the ‘juice’, and the patient is a lot sicker than the numbers reveal.’
I agree with Vern’s view — the European Union is a disaster, and Britain should leave. I won’t explain why today. I’ll save that for another day. Today, let’s discuss what to expect heading into the vote.
Regardless of which way it swings, one thing’s pretty much guaranteed: capital will seek a safe haven. In this case, expect the US dollar — and not gold — to take off in the weeks ahead.
Institutional capital — the smart money — really has no other choice…
Punters are likely to sell the pound leading up to the vote…
The euro is an absolute disaster. Greece’s economy still hasn’t recovered from its bailout —and it will probably leave the Eurozone this year. Italian banks are riddled with bad debts. Deutsche Bank — Germany’s biggest lender — has shown signs of going under already. Adding it up, the euro is destined for new lows against the US dollar.
The Japanese yen is still a basket case. Abenomics, the policy package created by Japanese Prime Minister Shinzō Abe, is a total failure. It hasn’t stimulated the economy. The Bank of Japan is moving towards deeper negative rates. Making matters worse, it hinted at passing these costs onto deposit holders this year. If this happens, smart punters will move their money into the US, where there are positive interest rates.
The Australian dollar, Canadian dollar and emerging market currencies are all typically linked to commodities. As I’ve explained to Resource Speculator readers, the commodities bear market still hasn’t ended. This should hit commodities currencies in the months ahead.
Looking at the big picture, the US dollar is going higher…a lot higher. If I’m right, gold’s good days are numbered. It certainly doesn’t look good for gold bugs in the short term. In my view, gold should crash to — at least — US$931 per ounce before the bear market is over.
In this case, forget about the recent gold bear market rally. If you made 100% or more, that’s great. But it’s nothing in comparison to what you could make in the future. When the time comes, I’ll recommend the best gold stocks to Resource Speculator readers. If you buy these stocks, at the right time, you stand to make huge money in the years ahead. Until then, keep your powder dry.
If you want to know more on this story, click here.
Resources Analyst, Money Morning
Editorial note: Jason has a strong view on gold in the short term, based on his ongoing analysis. Port Phillip Publishing believes in well researched debate, rather than forcing a ‘party line’. In today’s second Money Morning article, Jim Rickards takes up the counter-argument against Jason’s bearishness, and discusses the advantages of physical gold rather than gold stocks. Read on here.