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The Macro Backdrop Has Moved Convincingly in Gold’s Favor

Commentaries & Views

While equities continue to soar against the backdrop of the Federal Reserve Board of Governors preparing to cut already low interest rates, the gold complex has clearly broken out of a nearly six-year base right along with them. But before the Fed announced “uncertainty” about the economy at the June FOMC meeting, rates were already ridiculously low and financial conditions absurdly easy, feeding dangerous speculation in financial markets.

In fact, considering real world prices, real interest rates in the U.S. are already effectively negative and more than $13 trillion of European and Japanese sovereign debt trades at negative yields. This is both abnormal and unhealthy, along with the last thing the system needs to solve its underlying problems being even lower rates.

This of course is all very good news for gold speculators. Negative yields mean that investors are guaranteed to get back less money than they put in, which is a game changer for the gold market. Negative yields remove the opportunity costs from holding gold. Or put another way, two-year German Bunds have a negative yield of 0.77%, which is much less appealing than the 0.4% annual expenses on the SPDR Gold Shares ETF, giving investors no disincentive to hold gold.

Late last month saw some extremely heavy buying in the gold market that likely came from multiple sophisticated investors. Holdings of the SPDR Gold Shares ETF jumped by 34.93 metric tons, or more than 1.1 million troy ounces, on June 21. The upsurge was the largest ever one-day rise and was worth almost $1.6 billion, representing an increase of approximately 5% in the holdings of the fund.

Negative interest rates are only part of the reason why gold has most likely begun a new impulse move higher. Continued geopolitical uncertainty around the world is making investors nervous, so they want to invest in something which has historically provided a reliable safe-haven, like gold.

Moreover, after the yellow metal experienced a sharp, one-day test of its breakout below $1385 on Monday when President Donald Trump added momentum to Tuesday’s upswing back to well above $1400. The controversial U.S. President, who began to harshly criticize Fed chair Jerome Powell less than a year after appointing him in November 2017, made two nominations to the Fed’s board with candidates Christopher Waller and Judy Shelton. Both would be likely to support the President’s call for lower interest rates.

However, it was the announcement of candidate Shelton, a known sound money advocate, which triggered gold testing its recent high in overseas trade Tuesday evening just above $1440. On April 21, Judy Shelton posted an op-ed in the Wall Street Journal entitled “The Case for Monetary Regime Change”. The piece is an argument for the return of the gold standard, so it is no surprise bullion quickly rose to its six-year high in overseas trade just after the announcement.

After the nominations were announced, Bloomberg posted an article with a very gold friendly quote from Capital Alpha Partners LLC’s Ian Katz saying in a note, referring to the central bank’s chairperson, "If Trump is re-elected, he isn’t re-nominating Powell. So, we need to think of Shelton and Waller as potential Fed chairs”.

In this column on July 31st of last year entitled “Trump is in Position to Benefit Gold”, I mentioned it was possible that six of the seven Fed Board members could eventually be instated by the President. Although the Trump’s last four nominees for the central bank’s board failed to get through the confirmation process, both Waller and Shelton should have no problem being confirmed by the Senate, according to some analysts. Moreover, the President remains in the position to appoint more Fed Governors who may vote for a policy change in sympathy with his economic vision by shifting the FOMC to a much more dovish monetary policy.

Earlier this week, Christine Lagarde was nominated to be the head of the NIRP addicted European Central Banking (ECB) system, after Mario Draghi steps down on October 31st. She has formally relinquished her responsibilities as the IMF Managing Director during the nomination period. With Lagarde in charge of the ECB and Powell at the Fed, the two largest world economies will be controlled by lawyers.

Financial markets are in a dangerous phase as a combination of collective global central bank loose monetary policies, tariffs, sanctions, rumors of war between the U.S. and Iran, along with global supply chain disruptions place additional problems on a debt-burdened global economy. Despite the resumption of trade talks after the G20 last weekend, it appears as though anything other than a weak trade deal between the U.S. and China is possible, which should keep gold’s safe-haven component well bid.

Because of these on-going threats to the global economy, the Fed has left itself no choice but to lower rates, especially with Fed Funds set 75 basis points above 2-year Treasury yields and 50 basis points above 10-year yields. And because of the market beginning to realize the central bank is trapped into cutting already absurdly low interest rates, the entire gold complex has quickly shifted from a frustrating bear, to a very hopeful bull during what is normally its slowest season.

This unexpected turn of events has given speculators a literal “golden opportunity” across the entire junior resource space to get in on a nearly six-year ground floor before the next impulse move begins its run in earnest. When investors have witnessed a technically confirmed breakout in an undervalued and beaten down sector that is floating in a sea of overvalued assets, it behooves him/her to overweight that sector.

Furthermore, the precious metals space breaking out of this huge accumulative base will magnify the coming impulse move out of its consolidation, as market technicians know full well the bigger the base, the bigger the move out of that base.

After nearly eight years of a brutal bear, we are now technically in a gold bull market, so it is time to switch from bear market thinking to bull market thinking. Although the gold complex has become over-bought, the aforementioned macro situation may limit corrections to the short and sharp variety we have already recently experienced in the global miners and royalty firms. 

However, there is still plenty of bargains in left for dead junior gold stocks, as speculators are still cautious and skeptical having been burned so many times over the past few years. If you require assistance in choosing the best quality juniors to invest, please stop by my website and check out the subscription service at http://juniorminerjunky.com/

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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