| Dear John, As you know, the Fed hiked rates last week, in its final meeting of the year. This is the third year-end rate hike in as many years. The first two Fed moves launched gold on major, multi-month rallies that made small fortunes for investors in junior mining stocks.
So the operative question is: Will it happen again? It looks like it already is. A Good Start... The FOMC raised the Fed Funds target rate another quarter point, as everyone expected. And their policy statement, as I personally expected, once again straddled the line between the doves and hawks — noting how inflation has remained persistently and confoundingly low, but that economic growth remains sufficient for the central bank to plan for more rate increases in 2018.
If there was a surprise, it was the two dovish dissents from Charles Evans and Neel Kashkari, which likely reflected their concern over not just the strength of the economy’s recovery, but also the stubborn refusal of price inflation to rise.
Gold’s reaction has been positive so far, with the metal rising about $10 in the immediate wake of the Fed’s decision, and gaining about another $10 over the days since. Judging from the past two years, it could take a couple of days or a couple of weeks for the metal to begin rebounding more strongly.
And, of course, it might take longer. Or we may be wrong and it won’t happen at all. Markets are fickle like that, after all...which is why the lawyers’ “past performance” disclaimer is so ubiquitous.
Still, everything looks good — very good — so far. • The metals are rebounding, and the dollar is dropping...
• Physical demand in Asia remains strong, and...
• The “paper gold” market in the West is improving dramatically, with money managers selling their long positions while the commercials are desperately covering their short positions. I’ve been on record for months now in saying that gold was going to trade lower as the Fed meeting approached, and was going to take off after that rate hike was in the rearview mirror.
So it had been interesting, from my contrarian perch, to watch the crying, wailing and gnashing of teeth among the gold bugs as gold took a screaming nose-dive in early December.
My friend Dennis Gartman was perhaps the most prominent of these depressed gold “bulls” (he would be seriously affronted if I called him a gold “bug”). Although he mitigated his losses by holding gold in yen and euros, in his December 11 letter Dennis finally capitulated and slashed his gold holdings by half.
Moreover, he expects to further reduce his position if/when gold rallies to the $1,280-$1,290 range, thus violating his own trading rules for “doing more of what’s working and less of what’s not.”
Certainly, Dennis is not alone amongst the gold bulls tossing their towels into the ring.
Another good friend of mine, who shall remain un-named but is also one of the more prominent junior mining newsletter writers out there, emailed the following note to me in the midst of the market’s downturn: Pretty sh*t market all around it seems. Hard to see what helps next yr either. You got a better take than me? I gleefully dispatched the following reply: Of course I have a better take than you!
I’m actually optimistic about 2018, and the next few months in particular.
Think about how we felt around this time the last two years — there wasn’t much reason for optimism either, with the Fed about to put out a year-end rate hike and the prospects for more hikes seeming likely.
Then gold took off on big multi-month rallies almost immediately after those December rate hikes.
I think it’s very likely that we’ll see this pattern repeat once again.
Going into the new year, the Fed will talk a good game about more rate hikes, but if past form holds true the economic data will be mixed and doubts will run rampant as to whether they can follow their plan. This will benefit gold.
The primary differences between this year and the previous two are Bitcoin (robbing gold of potential risk capital) and the tax reform bill (which, if passed, will lead to repatriation of corporate cash from overseas, and the transfer back into dollars will tend to boost the greenback).
However, there’s also the probability that growth overseas will outpace the U.S., ameliorating or negating that effect.
And then there’s the longer-term story: Massive debt loads in developed economies, unprecedented money creation through quantitative easing policies and 5,000-year lows in interest rates as a result of ZIRP and NIRP have created a situation wherein we will never see “normal” interest rates again.
Over human history, the natural rate of interest has hovered around 6%. But given today's crushing debt loads, interest rates of even 3%-4% would crater the Federal budget in the U.S., for example.
Interestingly, a number of Fed governors/presidents have recently admitted that their target for the Fed Funds rate is only 2.5%. Yet they’re also jonesing for 2%+ inflation. That means their stated goal is an environment of ultra low (0.5%) or even negative real interest rates. That’s enormously bullish for precious metals.
Throw in the potential of a stock market correction/crash and/or a recession that would force the Fed back into easing mode, and the future looks bright for gold and silver.
How’s that for a take? I think that pretty much sums up my view of where we are and where we are likely going.
Again, I could be wrong. And I wouldn’t be completely frank if I didn’t admit that gold’s sell-offs didn’t shake my faith to some degree as well. Then again, that’s its job — to shake as many bulls out of the market before beginning the next move higher.
Now, the horizon looks bright instead of bleak...and we could be in the very early stages of the next big gold rally.
I’m excited.
I’m also grateful, now that we have this topsy-turvy year behind us, for your support through thick and thin. I know we don’t charge a penny for Golden Opportunities, but everyone in our organization works very hard to deliver tremendous value to you in each issue.
I think we’ve been largely successful, and I’m extremely excited for the days just ahead, and the value we’ll be able to deliver as metals and mining shares run higher.
So as we close out this year, please accept our sincere best wishes for a very Merry Christmas and holiday season, and a healthy, wealthy and happy New Year! All the best,
Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference
P.S. Once again, don’t forget about our Money, Metals and Mining webinar this afternoon, featuring Rick Rule, Mike Burnick, Sean Brodrick, Byron King and yours truly. It’s a no-cost, no-obligation opportunity to get our latest views on the markets.
CLICK HERE to register while you still can! |
