Gold to Break Out?

Yesterday I talked about US interest rates, the US dollar and gold. Let’s continue that discussion today…

Overnight the US dollar strengthened while gold lost ground. That makes sense. The two assets usually (but not always) move in opposite directions. The overnight moves reflect positioning ahead of the US Federal Reserve’s announcement on interest rates, which will happen tonight, our time.

The market already expects that the Fed will raise the official rate to 1.5%. The question is whether it will signal a faster pace of rate rises than the market currently expects.

You could argue the case either way. The US economy is strong. The labour market is tight. However, we are yet to see any real signs of a wage inflation breakout. On top of that, you’ve got Trump’s late cycle fiscal stimulus set to flow through. As I pointed out on Monday, in fiscal 2019 and 2020, the US government will run US$1 trillion deficits.

On this evidence, you could argue that the Fed needs to move a bit faster than it has so far in order to ‘normalise’ interest rates. Monetary policy is still very ‘easy’ and, combined with an outrageous fiscal policy at this time in the cycle, there is a lot of stimulus in the system.

Having said that, the authorities want to generate higher rates of inflation before they raise rates meaningfully. It was only a few weeks ago that the Washington based International Monetary Fund (IMF) suggested authorities leave stimulus in place for longer in order to tighten the labour market further and generate wage rises (and inflation).

Inflation reduces an economies’ real debt burden. Policymakers therefore see a bit of inflation as a good thing, despite it being hugely disadvantageous to those workers who have little bargaining power.

Still, policymakers operate in the aggregate. They have little concern for those impacted at the margin.

Then there is the question of where we are in the cycle, and whether Fed hawkishness is set to hit right as the economy starts to slow.

An article in the Financial Times points out that a measure of credit stress is starting to surface, indicating that financial conditions are getting tighter.

The Option Adjusted Spread for the Bloomberg Barclays US Aggregate corporate index has risen above key measures of momentum, or moving averages. The OAS is a measure of the average difference of yields when comparing government and investment-grade bonds. A rising OAS tells us that credit conditions are deteriorating.’

A rising OAS tells us that credit conditions are deteriorating. 21-03-2018

Source: Financial Times
[Click to enlarge]

The article continues:

Such a breakdown warrants watching from equity investors and also Fed officials. Record amounts of corporate debt sales in recent years that have helped fuel an aggressive merger and acquisition boom is the kind of late-cycle development that suggests a credit shock looms as the Fed steadily tightens policy.

With all this in mind, my guess is that the Fed will maintain its current interest rate forecasts, rather than signal a greater than expected tightening. Having said that, it is pretty standard for central banks not to see the end of the cycle looming. They nearly always tighten when the economy is already slowing. 

Whatever the short term positioning going on ahead of the Fed’s meeting, it is instructive to step back and look at the big picture. Yesterday I showed you a chart of the US dollar index. Here it is again:

US dollar index. 21-03-2018

Source: Optuma
[Click to enlarge]

Even if the dollar rallies post the Fed’s decision, technically, it still has a lot of work to do to be in a strong position. It broke down through long term support in January, which was a bearish development.

Gold often moves opposite direction to the US dollar

Now, let’s compare this chart with that of gold. If you look closely at the two charts, you’ll see that the support and resistance points formed at the same times.

Gold Futures Chart Daily. 21-03-2018

Source: Optuma
[Click to enlarge]

But while the US dollar index broke down through support in January this year, Gold did not follow. It still had a bit more work to do. In my view, gold’s move higher is just a matter of time. It might not happen tomorrow, next week, or even next month, but when it does, the price is likely to move very quickly.

If you want to profit from this potential move, you need to position yourself now. If you wait, it will be too late.

Many gold stocks have already performed strongly. Three of the gold plays in my Crisis & Opportunity newsletter are trading at record or multi years highs. They are up 30%, 40% and 50% from when they were recommended…and they’ve been in the portfolio for less than a year.

I only recently added a more obscure gold play to the portfolio, and it’s yet to take off. To find out more, and read about the coming bullion breakout, you can read my new special report on the subject here.

Greg Canavan,
Editor, Crisis & Opportunity

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Port Phillip Publishing.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Crisis & Opportunity. As the name suggests, Greg sees opportunity in a crisis. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines traditional valuation techniques with charting analysis.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Money Morning here.

And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here.

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