Dear Fellow Investor,
Gold continues to hold just below the next key level of $1,300.
If past form holds true, it’ll take a few assaults on this “big number” level, along with a couple of retreats, to finally get past it.
As I write, gold is up about $7.50 to $1,292 — perilously close to this next significant hurdle.
To put things in perspective, it wasn’t that long ago — the beginning of last summer, to be exact — when we were lamenting the fact that gold was falling through strong support at $1,300.
It’s taken that long just to re-approach that level from below.
Of course, what was once strong support from above becomes strong resistance from below, so that’s one reason to expect that getting through $1,300 will be tough. Another reason is that these psychological benchmarks have almost always proven to be persistent barriers that take a few tries to get past.
So it’ll be interesting to see how long it takes this time.
The good news is that we’re in a new gold market now — one in which investors realize that the Fed will backstop any stock market weakness, and be very willing to halt or even reverse its rate hike campaign.
Today’s eagerly awaited release of the minutes from the December FOMC meeting provided no surprises in that regard. In fact, the risk was that they might seem more hawkish than subsequent comments by Chairman Powell have indicated. That risk behind us, gold actually gained a couple of dollars after the release of the minutes.
No Surprises Yet
Gold’s post-Fed move is following the very same pattern of the last three years. This is no less than the fourth time we’ve seen this happen.
Thus, I’m not claiming to be a genius for predicting this move, over and over, for months preceding it. Rather, I’m absolutely amazed that others weren’t saying the same thing.
It seemed pretty apparent to me.
In fact, gold has sold off going into each of the Fed’s rate hikes since December 2015, and has quickly risen in the wake of almost every one. The lone exception was this past summer’s hike, when gold didn’t respond at all. But I think that one can be chalked off to the dollar strength that came with Trump’s trade war.
In short, this rally in gold is not surprising. In fact, it’s expected. And as it has continued to move higher, it has attracted the attention of mainstream investors and media, and trend-followers are starting to jump in.
But There’s Still A Story To Be Told...
Unfortunately, as good as everything looks so far, what we don’t know is how long this rally will last.
Will it evolve in line with what we saw in 2016 and 2017, when early-year moves lasted well into mid-year, catapulting the values of junior resource stocks far higher?
...Or will it be more like 2018, when gold stalled by the end of January, traded sideways for three months and then began a steady decline?
There’s simply no telling at this point.
However, it is important to note that monetary policy is solidly behind this move. The Fed’s apparent shift in monetary policy — or at least the market’s expectations for Fed policy — is truly astounding.
A year ago, I predicted in these pages that the Fed’s rate hike campaign would end by the end of 2018. But I was a lone voice in the wilderness, and it’s absolutely amazing to see the majority of the investing universe shifting their stances over the course of a few weeks to agree with me.
The shift in Fed expectations is, and will be, the major driver for gold going forward, and the primary reason why I think this move will be more akin to what we saw in 2016 as opposed to last year.
But also, and I don’t see anyone commenting on this so far, I think politics are beginning to play a big part in investor allocations.
The new Democratic House of Representatives is already greasing the skids for more spending and even higher deficits, tossing out “pay as you go” rules and other speed-bumps. You can bet that the Republicans will go along with bringing the bacon home, with only feigned reluctance.
I think the markets are already sensing this to some degree...and will do so increasingly in the coming days. The market’s fears will be manifested by stock selling and gold buying.
But if the Fed is ready to backstop any significant market weakness (and Fed officials have been eager to deliver that precise message in recent days), then both equities and gold will benefit from a more-dovish monetary policy.
As you see, either way, gold wins.
The bottom line is that, one way or the other, by a short-cut or a circuitous route, the Fed will end up in an easier-money stance. The U.S. equity markets, which at this point are the U.S. economy, simply will not stand for interest rates significantly higher than they currently are.
So the Fed will end up somewhere along the spectrum of a rate-hike pause, rate cuts or full-blown QE. Gold will rise in each of these scenarios, and explosively so toward the far end of those possibilities.
Junior gold stocks will move to a far greater degree than mid-tier or major miners in the rally we’re envisioning. Among the juniors, those with significant gold or silver resources to their credit will be the first-movers, and generally represent the best opportunities at this juncture.
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