Current Thoughts for 7/28/2016

Yesterday we had the Fed meeting and as expected, no change in rates. They did ramp up their rhetoric as usual about an improving economy and the odds of a September rate hike went up slightly but it looks like another December potential hike in the works, assuming the world doesn’t implode before then.

Our main indicator the dollar trumped all other indicators yesterday, even my secret indicator as someone who unsubscribed from my newsletter pointed out to me, not understanding that the Fed trumps everything, as the dollar fell below 97 again. This shut the door on any negative gold talk for the time being, but part of me wants to think this is a one off reaction move higher and we will continue lower. But that part of me also knows we have to have confirmation with the dollar.

I think we have to be patient a week or two more for reality to set in. Waiting on European bank tests tomorrow and then Japan’s decision where the jury is still out. The European banks are still in trouble as you can see by the 98% reduction in profits for Deutsche bank and from the 41% decline in the STOXX bank index for European banks the last year (28% this year alone). CNN was calling Deutsche bank the “riskiest bank in the world.” Reminder; this is from the engine to European production and growth.

european bank stoxx


I discuss the trouble with European banks in my book Illusions of Wealth, which is secretly out on Amazon.com but the launch date was moved to next Tuesday the 2nd.  My speculation is the Euro is in trouble and it’s compounded by refugee, terrorism, banking, Brexit, Greece, Italy, Portugal and an unsustainable monetary system that can’t go it with only a few powerhouses that themselves are showing signs of weakness. This is dollar bullish no matter how you slice it and one of the main reasons I am still concerned with the price of gold coming under pressure. Think about it this way, if the Euro shows further cracks, what is left as a power currency? If the European banks are crashing, and I would consider a 40% drop a crash, and Germany’s largest bank reports a 98% drop in profit, what are you supposed to think will occur next? Growth? Production? Stock market euphoria? Or possibly contraction? You know where I lean.

I had an exchange on Seeking Alpha with someone yesterday that explains what the Fed is up to. I think it will give you insight as to what games they play (and get away with so far) with the public.

Me: Fed makes positive comments about the economy and investors still believe them. Nothing else matters but what the Fed says. I explain this Illusion in my book. This won’t end well.DUST looking weak but only 9 cents lower than my comment above. Gold moved up $3 and silver a bit while the dollar had some extreme volatility, as if it matters. It’s flat for the day. This just tells me that everyone knew the Fed wouldn’t raise rates so it leaves only the change in their verbiage to trade upon. I’ll pass for now and wait for a better set up.Will keep 5.99 stop on DUST if dollar is under 97 and regroup if necessary. No doubles or home runs today and that’s the game you play when you fight the trend (which I said we were 1000% going against above). And just like that stopped out, lol.Follow the dollar for clues in my opinion. I will get back into DUST in a heartbeat. Fighting the trend one must be nimble with profits as I said above and also keep stops. Live to play another day. I don’t believe the Fed as I stated and we will see some real damage coming to the markets that will take miners down with it soon enough. 2 days of a move higher doesn’t change my thinking. Again; the dollar is key and I see it much, much higher.

Reply; So now there is a 30% chance that the FED raises its rate in September, up from 25% chance prior to today. It will be interesting to see if the markets will have a sharp correction taking the mining stocks down with them in the near future, or if inflation can step in to give us a small market drop followed by new highs. Yes, the $USD is still the strongest currency but with all of this easing happening everywhere isn’t it still possible that the equity markets could see a small correction/no correction followed by higher prices due to the devaluing of all of the currencies?

Me; My take is the Fed still ignores the data. When I look at data I try to read both Zerohedge and CNBC as I want the negative spin and the positive spin.My overall reading of the data is clear to me on where we are going and the Fed has no clue. If things are so great, one rate increase when all they did the last 18 months is talk up raising rates? lolAnd the market goes higher when the Fed changes a little verbiage on the strength of the economy? Really? My Lord.

Reply; Funny, I did check both Zerohedge & CNBC, just prior to my above comment as I agree, I like to read varying and contrasting opinions on matters like this. This all presents great perspective.My speculation is that the FED is a very intelligent operation and if we were sitting with them having a frank and HONEST conversation with them, all off record of course, I think they would confirm more of what you or I would think with regard to the economy and how they truly evaluate where we are at, where we are going, and what actions they plan to execute along the way. Their plan may very well be to extend the life as long as possible of a flawed system that they well know is terminal.That said, when they comment that the economy is improving and that they still may raise rates in September, and again in December, along with the past 18-months of head fakes, I do think it is their intention to send a distorted message to the markets to steer them in the direction that they the FED desire. I do think that the FED understands the data fairly well and possibly looks at data beyond what is reported or discussed on blogs like this. Privately, I also think they have a pretty good idea on where we are at and where we are heading. What they say publicly vs. privately are likely two conflicting stories. Still, I’ll admit it is possible that I have overestimated them.

Me: OAG, you haven’t overestimated them at all. In my book I speak to how since the times of Greenspan’s briefcase, it’s the Fed that the market turns to for direction. This is NOT how markets should work. However, the conflict lies in price action. One cannot ignore price action and must keep stops if certain levels are breached (traders, not investors, but even investors need to be aware of moving averages being breached). What the Fed is good at, and I have been saying this for at least 2 years now, is “talking the talk” to drive markets. Markets for some reason listen. They look for an excuse to go a certain way. Luckily for gold traders we also have the dollar to look at and that gives us direction too most of the time.

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About Doug Eberhardt

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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