Why Gold’s Overdue for Another Bull Market…

One week it’s up.

The next, it’s down…

Gold punters have had a tough few weeks. The yellow metal is trading below US$1,270 per ounce this morning.

Kitco summed up the mood on Monday:

Technically, gold bears have the firm overall near-term technical advantage amid the price downtrend on the daily bar chart. Gold bulls’ next upside near-term price breakout objective is to produce a close in August futures above solid resistance at $1,300.00. Bears’ next near-term downside price breakout objective is pushing prices below solid technical support at the December low of $1,251.90.

Which way will it go?

I’ll explain…

The interest rate story…

A lot of ‘analysts’ think higher US interest rates aren’t good for gold. Perhaps that’s why gold has pulled back lately:

interest-270618

Source: Tradingview.com
[Click to enlarge]

Remember, I have warned that US interest rates will rise four times this year. You’d think that’s not good news. But, until the latest interest rate rise earlier in the month, higher interest rates have supported the gold price since 2015.

Take a look at the chart below:

baby bull-270618

Source: Gold & Commodities Stock Trader
[Click to enlarge]

I showed this chart during my Paradox of Prosperity presentation in Melbourne last April. It shows that every time since December 2015, US interest rate hikes have formed a new higher low.

That’s a technically bullish pattern.

Historically speaking, gold always — without failure — falls into the US Federal Reserve meeting. You can see this pattern on the chart above. And, despite the recent pull back, it even happened this month:

trade-270618

Source: Tradingview.com
[Click to enlarge]

The move comes down to expectations. Traders buy US dollars, anticipating higher rates, putting pressure on gold. And when interest rates rise, they tend to close their positions and take profits.

The market expected three rate rises this year. But it’s now preparing for the fourth, and the mood’s changing.

That might be shocking the market…

It’s wasn’t prepared for significantly higher rates.

But that’s starting to change, which could be a good thing for gold this year. If the US Federal Reserve increases interest rates another two times this year, gold could skyrocket . Drawing a simple correlation of the gold price and interest rate increases — like I did on the charts above — would light up most people’s eyes.

Are you ready for the next gold bull market?

Have traders worked out that higher interest rates are bullish for gold?

Perhaps…

But, while we can’t be sure, the market now anticipates more rate increases this year.

That’s good news for gold.

The world is flooded with cheap debt, paying near-zero interest rates. Simple maths suggests when US interest rates skyrocket, the cost of credit should move higher. That should put pressure on the global financial system.

Remember, gold is a hedge against the sustainability of the financial system. It has rallied into each financial crisis since 1971. The Global Financial Crisis of 2008 and the European Sovereign Debt Crisis of 2012 were two recent examples.

Reuters discussed the latest story on 25 January:

The amount of dollar-denominated debt from countries and companies outside the United States has hit a record $11 trillion, new data from the Bank for International Settlements showed on Thursday.

The figures from the BIS, known as the central bank to the world’s central banks, showed the $11 trillion amount had been reached following a 5.2 percent rise year-on-year.

Thanks to a decade-plus stretch of ultra-low interest rates, global debt now stands at US$237 trillion according to the Institute of International Finance. Take a look at the chart below:

mature emerge markets-270618

Source: IIF
[Click to enlarge]

Emerging market debt stands at 210% of Gross Domestic Product (GDP). Most of that debt is written in local currencies, with about US$8.3 trillion recorded in US dollars.

That’s an issue…

Emerging economies aren’t exactly booming. In fact, many have experienced major issues with their budgets and currencies over the last few weeks. Telegraph.co.uk reported on 3 June:

A crisis that has hit some emerging markets risks spreading through the world economy, according to a global investment trade body.

Many countries are increasingly vulnerable to economic shocks following the debt sell-off which has hit Argentina and Turkey, a report from the Institute of International Finance (IIF), has found.

Lebanon, Colombia and South Africa have the potential to act as a “channel for contagion” to the broader emerging market economy, according to the IIF.

As global financial conditions tighten due to rising interest rates, led by the US Federal Reserve, levels of foreign-owned debt have risen to heights not seen since 2013.’

Need we say anymore? If the IIF says there’s a problem, it’s likely to be much bigger.

When interest rates skyrocket in the US, another emerging market crisis — similar to the late 1990s — could erupt. I suspect an emerging market crisis could happen by 2020, if the greenback surges with higher interest rates in the US.

That’s not good for much either, other than gold.

The bottom line: Ignore the gold sector at your own risk!

Regards,

Jason Stevenson,
Resources Analyst, Gold & Commodities Stock Trader


Jason Stevenson is Markets & Money’s resource analyst. He shares over a decade’s worth of investing and trading experience across resource stocks and commodity futures and options. He originally studied accounting and finance at Curtin University, where he was awarded a first-class honours degree. His professional background stems across high-net-worth, top tier accounting (corporate finance, tax and auditing), and sell-side equities research. Before joining the team at Markets and Money, Jason worked at boutique firms which advised fund managers and high-net-worth clients on where to invest. Whether it’s gold, crude oil, copper or an obscure metal like vanadium, you can rely on an in-depth analysis in Markets and Money. Jason also brings you extensive macro, political and geopolitical analysis from around the world. He leaves no stone unturned when it comes to telling the truth. Jason is also the lead analyst of Gold Stock Trader, a premium service for investors serious about precious metal stocks. Websites and financial e-letters Jason writes for:


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