Risk-On Dollar Burns While Gold Shines
Stewart Thomson | Feb 09, 2016 11:52AM ET
Gold has stunned most of the world’s analysts with a major rally after Janet Yellen hiked rates. The citizens of China also appear to have greatly increased their buying.
In the past few days, instead of waning, this rally has relentlessly intensified. Some gold stocks are showing 100%+ gains, just since the start of the year!
Chinese citizens always tend to increase their gold buying ahead of Chinese New Year, but turmoil in the Chinese stock market this year appears to be causing them to buy much more gold than they normally do.
Also, some leading commodity economists have suggested oil will begin a new up cycle later this year, and other commodities will lag, but ultimately follow. In response, many institutional money managers seem to be rushing to buy commodities now, to stay ahead of the crowd.
The most powerful gold price driver in the world right now. That’s daily chart of the risk-on US dollar versus the risk-off yen.
A huge head and shoulders top pattern is in play, and yesterday the neckline broke, creating panic selling of risk-on assets, and panic buying of both fiat and bullion safe havens.
I realize that most analysts in the gold community were stunned when Janet Yellen raised interest rates, and even more stunned when gold began to rally after she did. In contrast, none of this is any surprise to me at all.
I predicted Janet would raise rates, causing a meltdown in global stock markets, and a huge gold price rally. That’s exactly what is happening.
Most gold analysts look at the dollar index, the USDX. That’s a mistake. What matters to gold is the action of Japanese fiat versus American fiat. Japan is the world’s largest creditor nation. America is the largest debtor. Most global carry trades are settled in yen.
Also, Japanese citizens are maniacal savers, while most American citizens are notorious debt worshippers. That’s all the information any investor needs, to understand why the largest FOREX traders view the yen as risk-off fiat, and view the US dollar as risk-on fiat.
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The tumbling price of oil is enhancing the yen as the world’s top safe haven fiat. That’s creating a huge institutional rush into gold!
That’s the daily oil chart. While oil may trade sideways for a few weeks, the IEA now reports that demand growth has started to drop substantially, while supply from OPEC rises.
A fresh decline in the oil price seems imminent, and that could create more problems for US dollar investors, and for stock market investors. The yen, gold, silver, and precious metal stocks are becoming the world’s go-to save haven assets!
It’s hard to know how Chinese investors will react to all this “markets mayhem” when their markets reopen tomorrow, but with the neckline broken on the dollar-yen chart, the danger faced by all risk-on investors is enormous.
Janet Yellen is also scheduled to make a speech to the US government tomorrow. In it, I expect her to give the government a subtle chiding, for refusing to “cut the fat”.
Fed policies are not as effective as they were decades ago, mainly because the US government’s size has become a huge financial ball and chain.
Rate hikes are not about “normalizing Fed policy”. They are about pressuring the US government to downsize.
More rate hikes are coming, and when Janet unveils them, more mayhem is coming to risk-on markets around the world, including the dollar.
That’s the daily gold chart. The good news is that gold may be forming a large inverse head and shoulders bottom pattern.
While a price drop to form the right shoulder of the pattern may make investors feel uncomfortable, the dollar-yen chart price action suggests the pullback for gold may be milder. This gold price scenario is very likely, if the risk-on dollar continues to tumble against the risk-off yen.
That’s the Market Vectors Gold Miners (N:GDX) daily chart, and the price action is superb. I predicted that a breakout from the huge bull wedge pattern was imminent, and it has occurred.
Now it appears that GDX is forming a large inverse head and shoulders bottom pattern, much bigger than the one taking shape on the bullion chart.
That’s the daily Global X Silver Miners (N:SIL) chart. Silver stocks had a rough start to the year, because silver is an industrial metal as well as a precious one.
When modest risks appear, silver can lag gold. That was the case in early January. Now, much bigger risks are presenting themselves, and powerful FOREX traders are rushing out of all risk-on markets, and into both gold and silver. As the risk-on dollar begins its next leg down, silver enthusiasts can expect to see their favorite metal perform at least as well as gold, and perhaps even better!
Written between 4am-7am. 5-6 issues per week. Emailed at aprox 9am daily.
Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form. Giving clarity of each point and saving valuable reading time.
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