| Gold surged higher on Friday. Then it gave all the gains back yesterday. Looking beyond this short-term noise, gold is not an exciting market right now. What could make that change?
 
Gold is trading in a rough sideways trend with an upside bias. This bias continues to strengthen, albeit very slowly. The technical action reflects the fundamentals and liquidity flows and clearly, patience.
I jokingly refer to the SPDR fund as “Spider Man”. Chindian demand is decent, but Spider Man looks like he’s caught in his own web; while there’s no significant selling, buying has come to a standstill.
If Chindian demand is solid, gold doesn’t really need a lot of Western fear trade buying to move higher, but it must have some. That’s just not happening right now.
The winds of change may be in the air, with US wage inflation pressures intensifying, an approaching debt ceiling debate, and a new Fed chair who stands ready to significantly reduce bank regulation.
Without a bull cycle in money velocity, gold stocks and silver stocks will have a very hard time outperforming bullion on a consistent basis.
The good news: these winds of change (especially the small bank deregulation favoured by Fed chair Powell) mean there is a very high probability that US money velocity ends its two decade bear market in 2018.
Like Reagan, Trump’s administration is decreasing regulation and taxes while increasing debt. The main difference is that Reagan operated at the start of a business up cycle and at the end of an inflationary era. So, the Reagan administration could deflect government debt growth concerns with positive economic growth accolades.
In contrast, the Trump administration is operating in the tail end of the business up cycle and in the tail end of a deflationary era. The bottom line: US GDP can grow for another year or two and hit 4% to 6% on the upside, but liquidity is going to flow from Wall Street and government bonds into the fractional reserve banking system as that happens.
That’s because of quantitative tightening and rate hikes. Elderly American savers have essentially been nuked by QE and interest rates that are at multi-generational lows. Goldman predicts nine rate hikes in 2018 – 2019. I predict six, and the Fed dot plot suggests there will be seven.
Whatever the number turns out of be, with a tail wind of tax cuts and bank deregulation, significant liquidity flows are going to move into thousands of America’s small banks.
From there, it won’t be wasted on government bonds, which is deflationary. It won’t be used for stock market buybacks to give scummy corporate fat cats giant bonuses instead of giving American workers a pay raise.
That money is going to go to Main street small business loans, and money velocity stands to make a significant reversal as that happens.
As the business cycle peaks, even more money is going to flow into these banks… and into gold. In an economic downturn, Trump may need to look at unconventional policy like a new US Treasury gold buy program and high tariffs to manage the huge US government debt.
This is the dollar-yen chart. Different price drivers drive the gold price at different times. Sometimes gold leads a market, and at other times it follows. Currently, gold is playing follow the dollar-yen leader.
An important head and shoulders top is forming on the dollar against the yen. I told my intestinally fortified readers to prepare for some gold market pain early yesterday morning, and the “reign of pain” arrived just hours later, exactly on cue!
Nothing is out of order here. The dollar is rallying to form a right shoulder high against the yen, and that’s putting annoying but modest pressure on gold. Without the institutional support for gold stocks that comes with rising money velocity (particularly M2), the stocks get hit a lot harder than bullion.
Fund managers like Ray Dalio recommend keeping 5% to 10% of assets in gold. Ray owns a lot of gold stocks as well. In the gold community, gold is generally owned more aggressively, often representing 40% in an investor’s portfolio, and more!
I have no issue with the higher percentages (and partake in them myself). To build retained wealth (and maintain emotional stability) in the sector though, gold bugs need to buy significant price weakness.
Holding some assets besides bullion and the miners is also important. Just as gold is a stock/bond investor’s tool to maximize returns and reduce drawdowns, mainstream stocks and bonds serve a gold investor in the same way.
I coined the term “gold bull era” to describe the long term growth of gold demand related to growth in China, India, and other Asian and mid-East markets.
I’ve highlighted a solid upside breakout from a massive triangle pattern on this South Korean stock market ETF chart. I urge all gold bugs to buy and hold some China, India, South Korea, and Japan stock market ETFs and individual stocks. The bottom line: The Asian stock market upside breakouts represent stage one of the gold bull era. Don’t miss out on the wealth building fun!
Another great holding for gold bugs is bitcoin. A lot of investors ask me how bitcoin staged a “forty bagger” move while gold has gone nowhere. The answer is simply that the supply of bitcoin is only 21 million coins. My long term (not that long) target for bitcoin is $500,000. If the supply of gold was only 21 million ounces, gold would already easily be at $500,000, but the demand-supply balance for gold is much more even (for now) than it is for bitcoin. Bitcoin shouldn’t be viewed as a competitor to gold. I’ve labelled bitcoin a positive member of the precious metals asset class family, and predicted it will play a major role in the gold bull era.
This is the exciting Chow Tai Fook chart. Chow is the largest gold jewellery retailer in China. I cover the wealth building action for Chow in my www.gracelandjuniors.com newsletter. Chow’s price action is also a truly vital indicator of what lies ahead for the Western gold mining stocks. It looks set to usher in the new year with an upside blast higher from a broadening consolidating pattern which should send the miners higher too!
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