Gold and silver both erased morning declines and pushed higher today after FED chair Janet Yellen announced they would leave interest rates unchanged. Policy makers gave a mixed picture of the U.S. economy, citing growth in some sectors but slowing job gains. While the median forecast of 17 policy makers remained at two quarter-point hikes this year, the number of officials who see just one move rose to six from one in the previous forecasting round in March. I also expect no more than one rate hike this year from the Fed Chair Who Keeps Yellen’ Wolf.
If you have been folloing our forecasts, we have never been convinced that the FED would be able to raise rates as aggressively as they had been forecasting. Global markets are simply not strong enough to handle any significant hike in rates at this juncture. We have been buying the dips in precious metals every time that Yellen hinted at raising rates. We will continue to call her bluff and snap up discounted mining shares whenever weak hands panic.
Gold advanced by $8 (0.6%) to $1,294 and silver by $0.16 (0.9%) to $17.50 today. These are somewhat muted advances, but then again nobody really expected the FED to raise rates today (odds were just 2%). They may have to eventually increase rates by 25 basis point in an attempt to save face and convince investors that the economy is healthy. But we believe the FED will be backtracking, looking to lower rates and increase stimulus at some point in the next 12 months as markets roll over and correct sharply.
Mining stocks continued offering strong leverage to the underlying move of the metals, with the Gold Miners ETF up 3.75% today. That is daily leverage of more than 6X the advance in gold and 4X the advance in silver. Year to date mining stocks have offered leverage of 4X the advance in gold and 3.5X the advance in silver. This type of leverage is more pronounced during the early phases of bull market advances. We have been positioned to take advantage of this trend and our subscribers have been generating significant gains in 2016.
It was interesting that Yellen mentioned the Brexit vote today. She said that uncertainty ahead of the U.K. referendum, which will decide whether or not to leave the European Union, impacted the central bank’s monetary policy decision. The Brexit vote was discussed during the meeting and was a factor among committee participants.
“It is a decision that could have an impact on global economic and financial conditions,” she said. “It is certainly one of the uncertainties…”
Despite the widening lead for a Brexit in the polls, I think the UK is not likely to be allowed to leave the EU. Therefore, we can probably expect a pullback in gold and silver prices following a “remain” vote on June 23rd. Gold still needs to break through key technical resistance at $1,306. We will likely wait for the UK referendum before adding any new positions to the GSB portfolio. I think it will provide an excellent opportunity to add to current positions, whether there is a dip on a ‘remain’ vote or a major breakout on a ‘leave’ vote. Either way, we expect much higher gold and silver prices by year end.
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