Who said history couldn’t predict the gold price?
The yellow metal has given gold bulls a thrashing over the past couple of weeks. Gold is down almost US$60 since late February. I wrote on 8 March:
‘The story gets worse for gold bulls…
‘The US federal government will hit its debt limit on 15 March. Despite the wider mainstream opinion, that could push gold prices down to US$1,200 per ounce.’
Indeed, with this deadline a few days away, gold has done precisely that. That forecast, mind you, wasn’t prophetic. Gold fell during March and November 2015, when the US government last tested the debt ceiling.
It appears that history is a reliable forecast!
Fortunately, with the bears having won that war, gold bulls seem ready to take revenge. Following gold pulling back into the US Federal Reserve meeting tomorrow, in my opinion, it should bounce into March-end. That could see gold bounce towards the US$1,230 per ounce level.
Sell the rumour and buy the news
Market Watch reported on 10 March:
‘Gold prices fell for a ninth session on Friday, contributing to a loss for the week as better-than-expected U.S. employment data backed the likelihood that the Federal Reserve will decide to boost interest rates at its meeting next week.
‘Prices, however, held their ground above the key $1,200-an-ounce level and ended off the session’s lows despite the upbeat economic figures. Data Friday showed that the U.S. added 235,000 new jobs in February, cementing expectations that the Fed will raise interest rates next week.
‘However, “gold speculators appear to have turned their attention now from the apparent surety of March to future rate increases,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management. The report was “not sufficiently strong…to convince the market that the Fed will make it to three rate increases in 2017.”’
Rob Haworth must have read the wrong US payrolls (jobs) report. The number of new jobs created beat expectations by 35,000. Federal Reserve Chair Janet Yellen stated a fortnight ago that if jobs and inflation data stacked up, the central bank would raise interest rates. That appears likely on Wednesday when the Fed convenes.
US bond prices are also lower, signalling higher interest rates. US 30-year Treasury bonds are trading at around 147 points today, down from 153 a fortnight ago. Bonds appear to have broken support, and are signalling higher interest rates. For that reason, Rob Haworth’s claim that the Fed won’t raise rates three times this year seems unsupported.
It’s only March….
US economic data is becoming consistently stronger, with the stock market trading around all-time highs. There hasn’t been a 10% stock market correction in over a year, with little economic uncertainty to panic investors. I believe the Fed remains on track to raise rates a few times this year, especially if bond prices continue to fall and stock prices surge.
Nevertheless, with one rate increase seemingly out of the way for the year, it’s time to buy gold again. To put a spin on an old saying, it’s time to ‘sell the rumour and buy the news.’ The US dollar is due for a slight selloff, especially with the political uncertainty in Europe. The political landscape looks pro-euro for the time being, and that could see gold bounce as March draws to a close.
The most important political event that no one cares about
The Dutch election is the most important political event taking place this week. When speaking to a few colleagues, they told me it doesn’t matter…the Netherlands is a drop in the ocean.
But its election should set the tone for the euro in the weeks ahead. Remember, the Netherlands is part of the Eurozone.
Geert Wilders — a far-right politician for the Party for Freedom (PVV) in the Netherlands — has vowed to call a Dutch referendum on European Union membership. That is, if he wins the election on 15 March. His plan also signals an end to the country’s Eurozone membership.
The Guardian reported on 12 March:
‘With only days to go, the race is becoming a scrum. Far-right populist leader Wilders has seen his once commanding lead in the polls wiped out, but his main rival, Rutte, has been unable to capitalise on this. Rutte’s liberal VVD party has a narrow lead of around 25 seats with Wilders’s PVV on 22. But the chasing pack are closing in: the Christian Democrats and progressive liberal D66 group are on 19, followed by GroenLinks with 16.’
There are more than 30 political parties. The current Dutch government is comprised of the right-wing People’s Party for Freedom and Democracy (40 seats), led by Prime Minister Mark Rutte, and the centre-left Dutch Labour Party (36 seats).
That seems like a strange mix.
The People’s Party for Freedom and Democracy (VVD) is similar to the Australian Liberal Party. The ruling VVD party wants to introduce tougher rules for new immigrants, which would require them to speak Dutch and have a paid or unpaid job before they are considered to have passed their integration exams.
The Dutch Labour Party (PvdA) has long been a supporter of immigration. And with the nation already struggling with high immigrant numbers, Labour, too, is struggling.
Meanwhile, Democrats 66 is a communist and pro-European Union party. The Socialist Party has socialist/communist ideals, wanting to increase taxes. And the GroenLinks — similar to the Green Party in Australia — seems like a disaster for the economy. It wants to impose a 15-cent-per-kilometre rush-hour tax! Plus, the leader, Jesse Klaver, compares himself to Barack Obama and Canadian Prime Minister Justin Trudeau. That’s gained him a bit of support, but most Europeans that I talk to are pro-Trump (tighten the borders) and anti-Obama (let everyone in).
This result could trigger a bounce for gold
With plenty of choices, observers believe that Wilders will win the most votes. A contact of mine in the Netherlands believes Wilders will win the election with over 40 seats. The polls are currently saying he will win 25 seats.
A Wilders win should be an enormous boost for Marine Le Pen — the far-right French presidential candidate that wants France to exit the Eurozone. The French election is set for 23 April.
But a Wilders victory wouldn’t mean as much as you might expect.
The winner needs 76 seats to form a majority, and no party has said they will work with Wilders under any conditions. He’s too far-right and wants to ban immigration. He’s extremely anti-Islam, which has gained popularity on the back of the refugee crisis and terrorist attacks across Europe.
It appears that no party will win the election outright. A hung parliament looks likely. But because Wilders is unlikely to form government, the euro should bounce higher — standing to live another day. Together with the US dollar selling off following the interest rate decision, which is priced into the market, gold could bounce.
Gold priced in US dollars should move higher as the US dollar pulls back into March-end.
That’s great news for ‘penny gold’ stocks, some of which have consistently outperformed the market recently. But it’s also good news for ‘penny silver’ stocks, as the silver price correlates closely to the gold price.
One ‘penny silver’ stock in particular is the cheapest on the ASX. It’s currently in a trading halt, acquiring a new project. Good news — possibly out tomorrow — could send the share price skyrocketing. To find out more details, click here.
Editor, Markets & Money