Gold: Where To From Here?

Gold fell $23 today to $1,235.90 after hitting a low of $1,230.10 and silver after opening up stronger, gave up all of its gains and fell from high to low 50 cents, finishing the day off at $15.37.

Can you guess this is Fed week again? 

Oil started off the day down and then fell hard taking the stock market with it. From there it slowly moved higher but the stock market began to fall again in late afternoon. 2000 seems to be the line in the sand right now for S&P500 futures. All in all stocks were mixed on the day as we await once again a decision on what the Fed does with interest rates on March 16th. Believe me when I say, the Fed will not raise rates. Everyone knows this. But the Fed as always will talk like the economy is improving and inflation is just around the corner. Well guess what Fed? The economy is not growing as seen in the GDP chart below.

Look to Europe and Japan as to What Makes an Economy Competitive

I don’t want to get political here but I do want to make the case that Donald Trump does have a better grasp on what China and Japan are doing with their currencies but he should also include Europe (no, I am not going to address free and fair trade now). But we can analyze just two economies of late that have manipulated their currencies resulting in improvement for their economies at the expense of the U.S. economy; Europe and Japan.

Europe Currency Manipulation

You can look to a more proactive ECB as the main culprit but also to Japan the last couple years.This is how the world works folks. Your strength of currency as a nation, among other things controls your economic activity.  The weaker your currency is versus your competitors, and the lower your wages in producing, gives you advantages over nations with stronger currencies.

Most who sell gold for a living, like pretty much every gold dealer in the United States but us, talk about a crashing dollar. No, the dollar is not crashing, but the Euro and Yen do not fall in a straight line. You can count on Draghi and Abe to do more to weaken their currencies and get their economies going.

In fact, the Fed was waiting for this green light, which everyone assumes now shows that all is well for the most part in Europe and Japan (although Japan’s exports are not but Fed I think is more concerned with Europe which shows decent data of late). Draghi overseas is doing all he can to lower the value of the Euro but thus far it’s not working as well as he would like.

Indeed you can trace back the real strength of the dollar to Draghi’s statement in July 2014 that he and the ECB will do “whatever it takes.” The dollar took off as seen in the following graph.

You’ll notice that European exports got stronger as the Euro got weaker through the beginning of 2016 with higher lows (a bullish sign of an economy).

But with this last ECB meeting recently, Draghi made one mistake; he softened his tone on negative interest rates as the market looked at his comments as setting a floor. While the Financial Times viewed this as a positive, the Wall Street Journal said that ECB monetary policy is “reaching the limits” and “is causing markets a headache.”

What everyone missed in all of this though is the overstepping of the ECB in purchasing corporate debt and that bond markets sold off sharply pushing up yields. What also was missed is the fact that even though negative rates sunk to a record low of minus 0.4%, who is going to go out and do borrowing when corporations and small businesseses are reducing debt?

Banks in Europe are already experiencing problems with corporations holding on their books debt higher than the current rates. How does lowering the rates more help those corporations already in debt let alone the European banks?  Well, it has temporarily helped the banks (remember, every government/central bank will do whatever it takes to help the banks. The STOXX 600 has bounced off the lows recently but destiny lies in the 200 range, not 400 range as the following chart shows. It’s just a matter of time and Mr. “whatever it takes” as the Wall Street Journal says, has reached its limits. The bottoming has to be played out.

Japanese Currency Manipulation

We haven’t heard from Japan’s Shinzo Abe in a while but I expect to soon. These countries have only one hope to get their economies going and that is to lower the value of their currency and make their exports more desireable abroad and thus drive up their own GDP. This worked for Japan for awhile but they will soon lob up another half court shot to get their country back in the game of higher exports. They just hope they make the shot but mark my words, it’s coming. Teams that live by the long shot, die by the long shot and Japan’s story won’t be that of a Cinderella but a major country showing that its era as a once powerhouse has come to an end (in football terms it would be a “Hail Nary” pass but it’s March Madness time).

Gold: Where To From Here?

Where to with gold from here is what we all want to know. We are presently in a range and as Europe begins to implode, spurred on by its banking system that can’t possibly function without doses of liquidity by the IMF and Germany as they contend with their own weakened balance sheets from dealing with Greece and we throw in Japan and their issues, the dollar should move over 100 and do so quickly. We saw a little bounce today in gold but we have to let this dollar/gold inverse relationship play out a bit longer and get back in step.

You can see the extremes on the chart below. We are range bound and will bust out of this range soon enough with my bottom of $900 in gold still in play.

My advice has been the same for years; dollar cost average into a position in gold and silver and look for some resistance which we are already seeing coming in now after hitting close to $1,280 in gold. Watch the dollar rise in value over 98, 99 and then 100 on its way to 120 to have the final nail in gold to get below $1,050 then $1,000. It will catch most by surprise. Yes, I know I am on the side of Goldman Sachs with the decline in gold but don’t hold that against me. I am on the side of my own research and I’ll stick with that analysis.

In this article I am simply trying to connect the dots and show how it’s not just a U.S. game we are playing but that of many countries. I bring up the two major components of the U.S. dollar, the Euro and Yen, but this deflationary credit contraction will wreak havoc on all Asian, Latin American and Middle East currencies too. The U.S. dollar during this contraction will be the beneficiary of safe money. Watch oil fall under $35 then $30 as another sign of what’s to come and we’ll look to call the bottom in gold at the appropriate time.