Gold moves make sense

The editorial below was published Saturday and looks at gold’s crazy gyrations on Friday. Fed Chair Janet Yellen said essentially nothing in her much-watched speech at Jackson Hole. Given that she uses such events to telegraph Fed moves, her silence spoke volumes – not being hawkish is the same as being dovish.

And a dovish Fed is the key event that will push gold higher, I conclude below. It will take time for the Fed to change direction though, and in the meantime all kinds of gold-bullish catalysts could easily crop up, as I conclude: “any number of Trump moves, debt ceiling fireworks, dovish suggestions from central banks, weak inflation or economic readings, terror events, or geopolitical turmoil.”

They’ve all happened of late and can easily happen again – and we saw exactly that today. Gold jumped 1.5% today to close well above $1,300 per oz. following Draghi’s lack of hawkishness, the US dollar not rebounding, and news late in the day of North Korea test-firing another missile, this time right over Japan.

Not just besting $1300 but getting markedly above it and staying there – it’s a very strong sign from gold. With summer winding down and traders returning to their desks, this move could foreshadow a strong September for gold.

In the meantime, the rest of my article from Saturday is below. The Maven Letter also included analysis of the recent upside moves in copper and zinc, looks at three new investment recommendations one week later, and updates from a host of Maven Portfolio holdings.

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Snipped from The Maven Letter: August 25, 2017…

Yesterday’s gold price chart is crazy:

Not only did gold oscillate up, down, and up again by as much as a percent in an hour, it did so because Janet Yellen didn’t say anything about interest rates.

Yellen didn’t say anything much of interest. Her entire speech at the famous Kansas City Federal Reserve Bank’s symposium in Jackson Hole was a defense of central bank actions since the economic crisis.

That disappointed a market desperate for hints about what the Fed will do over the rest of the year with interest rates and its massive balance sheet. No one really expected Yellen to reveal interest rate plans – more on that in a moment – but there was some expectation she would use the speech to further outline how the Fed will reduce its balance sheet. We know the central bank plans to start that process in September – which is right around the corner – by not reinvesting proceeds from expired treasuries, but we don’t yet know details on the scale of the effort.

Does it matter? Yes and no. Yes in that reducing central bank support for government debt will hurt bond prices and boost yields. Rising bond prices pressure the dollar and disturb confidence. And more generally, reinvesting in bonds until now has meant that the Fed has really maintained some stimulus; ending the reinvestments is truly the end of QE.

Given the Taper Tantrum that happened when the Fed announced the end of its bond purchase program – markets slid and the dollar dropped – I’m surprised at the seeming complacency around this impending change.

That said, it doesn’t matter that much because the Fed will move very slowly and carefully in this effort and will telegraph each move, which is why there has been no freak out yet. Also the bull market is so entrenched now that almost everyone will just keep betting on it, Fed actions be damned.

On the interest rate front, expectations of a September rate hike were low before Yellen took the stage this morning. Following her remarks, they are just about zero.

I think the market has this one right. If Yellen et al were even thinking of raising rates next month, she would have used this moment to let people know. The Fed has not been surprising since the Great Quantitative Easing Experiment began; by contrast, Yellen has done her all to prepare the market for each Fed move.
So I am comfortable saying there will be no rate hike next month.

So that’s Jackson Hole. The great event came and went with very little significance.

More significant has been gold’s actions of late. The yellow metal is pushing up against $1300 per oz. for the third time in less than four months.

The mid-April effort was weak but the June push was real and this August effort has seen spot and contract prices best $1300 several times.

After the last two pushes the price dropped back, and to almost the same level each time. The result is a price that has been oscillating in a tight trading range for months.

Such patterns usually end with a breakout, either up or down. The direction will depend on the next major catalyst – and odds are good the catalyst will be bullish.

The list of possible – even likely – events that would push gold up include any number of Trump moves, debt ceiling fireworks, dovish suggestions from the Fed, weak inflation or economic readings, terror events, or geopolitical turmoil. All have happened of late.

Of those, I think a dovish Fed is the most important. Inflation as per CPI measures has come in below estimates for five months in a row and is far from the Fed’s stated 2% objective. It’s not temporary, whatever various Fed governors might continue to say.

Another key factor is commercial bank lending. Bank lending is what makes the economy go round (which is why low interest rates are the go-to tactic when economies stumble). Bank lending in the US flatlined in 2015 and is now down, not up.

You can see that the Fed usually raises rates while commercial lending is on the rise, but this time rates stayed totally flat while banks lent out more and more money to businesses. Now banks are pulling back because their analyses show risks are rising. That pullback will only sharpen if the Fed raises rates any more.

And that’s no good – GDP correlates tightly with bank lending, so less lending means less growth.

Looking at the data, I think the Fed will turn dovish. If that happens, the markets will turn to gold because a dovish Fed negates all current assumptions around economic growth, falling bond yields, rising rates, and a stronger dollar.

The questions are whether I am correct and, if so, when it happens. Gold needs a reason to rise above $1300, and soon otherwise upward momentum could ebb. I don’t see the Fed changing its stance significantly in the next month, so that’s not going to provide the push. Longer term it certainly could, even over just the next six months.

In the short term we just have to wait and see what happens. As I said, most recent events have been gold bullish and I see that trend continuing, supported by seasonally strong buying.

And if gold does find a reason to get above $1300 and stay there, I think gold stocks will move up in a significant way. That leverage that’s been missing (as I discussed last week) is like a coiled spring, waiting to dole out all that leverage as soon as investors get some confidence that gold’s rise has got gumption.

It’s interesting times, for sure!