You gotta love the Fed. The funny part for this gold analyst is that investors actually believe in what they say and ignore the data, let alone how slow the Fed is to do anything. All last year we heard CNBC and everyone else ask for a rate hike and the entire year the Fed says they were looking at doing it and never did until December. When they finally did, as I mentioned in my last blog article, most were looking for 3 or 4 more rate hikes in 2016. But the stock market started the year off with it’s worst performance ever and the data that came in also did not show a growing economy. The Fed held off on their call for more rate hikes and gold and the markets along with all other commodities took a nice ride higher. Now the Fed is saying in their minutes that they may raise rates in June. Zerohedge has a good chart from BofA Merrill Lynch that depicts the Fed and their talk the talk versus action and how the markets react.
Wasn’t it just April 28th that we learned the US first quarter GDP showed the economy grew at the slowest pace in 10 years? That business investment was the “weakest since the Great Recession?” What are we missing here and why would any investor believe what the Fed says versus what the data says? Answer: because markets trade on news and can move on news and ignore reality for short bursts. Eventually reality sinks in and/or enough people like me point out that not all is well with the economy.
Question: Doug, how can the economy be bad and the dollar move higher? Today we saw the Fed threaten to raise interest rates and portray a stronger economy and the dollar moved higher. Why do you say the dollar will get stronger and gold possibly fall with a weaker economy?
Answer: Because the dollar and treasuries are the go to assets in the beginning of a recession or something worse. It is the flight to “perceived” safety where smart money goes in the beginning, just as it did in 2009 when the dollar and treasuries got stronger, despite all hell breaking loose with the subprime derivatives and banking fiasco. Banks went under because of bad bets but the dollar and treasuries is where money flowed during the crisis and technically since 2011 as well.
What did gold do with the threat of higher rates? It fell sharply today as seen with the red candle down in the following chart and the dollar shot up over 95. It is clear investors still believe in the Fed and ignore the data.
Question: Doug, interest rates came down from 2011 to 2015 and gold came down too. In essence, lower rates were bad for gold during this timeframe. The Fed raise rates in December and once word got out that they would not raise rates, gold began to move higher with the markets. Now, with the Fed threatening higher rates with a possible June hike, higher rates are bad for gold as shown by the spike lower. What gives?
Answer: If anyone tries to answer that question, good luck in finding a good correlation. Why not look at the dollar and gold? Isn’t this what I consistently write about? Isn’t this a better indicator? At least for the time being? Since 2011, gold fell in price as the dollar moved higher. At the end of 2015 and through last week, the dollar moved lower and gold moved higher. I have said repeatedly that they tend to move opposite of each other. At times, yes, they can move together, but this is typically short lived. If we are entering a real deflationary credit contraction, which I continually make the case for, at some point you may see the dollar and gold rise together. This is explained in detail in my book Illusions of Wealth, if they can just finish formatting it!
If you ever play chess you know that the way to win is by mapping out a strategy with forward thinking that will eventually pay off. The Fed does some forward thinking when it comes to talking up their game plan without having to actually make a move. But their actual moves eventually expose their ignorance of the game because they are continually reactive and by then it is too late. We can’t forget that they didn’t see the 2009 crisis coming and even though they speak about global issues, and for good reason, there is nothing they are going to be able to do to counteract the deflationary market forces that I see coming. When the credit contraction hits all 8 cylinders, the Fed will be the deer in the headlights and get run over (no offense to animal lovers please, it is a metaphor only).
Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534
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