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Dear Fellow Investor,
The red light on the camera came on, and I was speechless.
No, this isn't a stage-fright horror story. Stick with me on this.
I was bouncing around the exhibit hall earlier this week at the big PDAC mining confab in Toronto, and a reporter for one of the investment websites grabbed me and asked if I could do a quick interview.
No problem, I had a few minutes to spare.
As the cameraman set up, he asked what I could talk about and I confidently replied: "Anything you want."
Next thing I knew, the red light came on. The reporter turned to me and asked, "Where do you think gold is going in the short term?"
After a few seconds pause, I had to confess, "I don't know."
The simple fact is, as I managed to elaborate after that admission, the short-term moves in the markets have been impossible to predict.
Not only is everything dependent upon the headlines — which are themselves impossible to predict — but the market reactions to news have been entirely random.
Expect The Unexpected
Consider what happened a few weeks ago, when a hot CPI report ignited fears of inflation. Previously, this would have implied more-hawkish Fed policy, and gold would've been sold down.
Instead, investors bought gold — "rediscovering" its allure as an inflation hedge.
And then we had the release of the minutes from the last Fed meeting, which were dovish.
The reaction? Not what we expected: The "bond vigilantes" emerged to drive yields higher, because they didn't think the Fed was taking the economic situation seriously. So stocks and gold tanked.
Then came today's stunning jobs report: It showed 313,000 jobs being created in February.
That absolutely trounced the consensus expectation of around 205,000 jobs.
Not only that, the previous two months were revised higher by 54,000 jobs in total.
This was an incredibly positive payrolls report, and extremely hawkish in terms of Fed policy. There seems no doubt that the FOMC will raise rates again on March 21st.
So, based on how investors have been reacting to such events since 2008, gold should have been sold off on this news.
Granted, it was...at least initially. Right after the report's release, the metal was pushed about $8.00 into the red.
But then it turned around. As it began to recover, I made a bold prediction on Twitter that it would end the day in the green.
Right now, it's a few dollars into the green, and my prediction seems safe.
But the point is, who would've predicted that such a positive jobs number would've driven gold higher today?
And the lesson is, this is why we focus on the long-term trend.
What's Really Driving Gold
Gold turned back up today because the dollar turned down.
And this is what I keep getting back to: The inverse correlation between the dollar and gold has been exceptionally close over the past two years; when the dollar rises, gold falls, and vice versa.
So, with the daily trading volume in currency trading being about 50 times greater than that of gold, we obviously need to investigate what's driving the dollar to determine what's going to happen with gold.
My view is that the big money is looking beyond the Fed's current rate hike program (which is likely to end this year, after all) toward where the next rate hikes will come from.
And the next quantitative tightening will come from Europe, Japan and Britain. So the smart money is shifting in favor of those currencies over the dollar.
I won't even bother to address the other problems with the U.S. dollar — an unmanageable Federal debt, annual deficits back to $1 trillion and emerging inflationary pressures, among many other things.
Add it all up, and there's little wonder why investors are seizing every excuse to dump the dollar...and buy gold.
All the best,
Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference
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