Fed aftermath: Gold rises on weak dollar, markets nervous.

As the world will be aware, the US Fed Open Market Committee (FOMC) has yet again delayed any decision to raise interest rates and the dollar and gold both reacted accordingly.  The dollar index fell while gold rose – although the rise in the latter was primarily just a direct response to the fall in the former – not a specific indicator of much in the way of increased interest in the yellow metal, at least initially.  But this morning, with European markets open, gold has indeed risen at the time of writing, and while the dollar has continued its fall, so far gold has moved up by a greater percentage than gold has fallen indicating perhaps something of a start in change in investment sentiment.

What is perhaps more surprising – and another indicator of sentiment change – is that post the Fed announcement, U.S. markets fell back – continuing their recent downwards trend.  One might have assumed they would have risen on further postponement of any Fed commencement of rate tightening, but the markets may be taking this as an indicator that the U.S. economic recovery is perhaps not all the investment public has been led to believe.  Indeed some indicators also released yesterday were indeed weaker than anticipated.

Asian markets overnight were a little mixed – Shanghai was up by a very small percentage as was Hong Kong’s Hang Seng but Japan’s Nikkei fell – and in Europe the major indexes also opened lower. The Dow has taken a sharp downturn this morning too and is around 8.5% down year to date and 10% down from its May peak. With losses exceeding gains quite substantially over the past two months there is an element of fear in global stock market investment that we could be due for the increasingly frequently predicted market crash following the prolonged 6-7 year bull phase following on from the massive 2007-2009 falls when the Dow plunged around 50% over 16 months.

Over the past 3-4 years  gold has definitely been out of favour with Western investors with the price seeming to slip continually down to a low point of just below $1090 at the beginning of last month.  Major bank analysts subsequently fell over each other to predict a continuing price fall – down to $1000 or even less – but at least so far there has been no indication that this is likely and gold has recovered from its lows to trade consistently back above the $1100 mark.  Where it will go from here we don’t know – but with the seemingly increasing nervousness among major stock market investors, the yellow metal’s safe haven appeal may well be on the rise again.

The Elliott Wave chart analysts are mostly predicting sharp rises as, of course are those ‘always bullish’ commentators.  Gold holders will hope they are right after 4 years of mostly declining prices.

Contrarian view of gold ‘scorching hot’

By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors

Gold last week broke above its 50-day moving average as a fresh round of negative news from around the globe rekindled investors’ interest in the yellow metal as a safe haven. The Fear Trade, it seems, is in full force.

Gold Breaks Above Its 50 Day Moving Average
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Below are just a few of the recent news items that have made some investors skittish, which has supported gold prices:

  • China, the world’s second-largest economy, continues to slow. Its preliminary purchasing managers’ index (PMI) reading, released on Friday, came in at 47.8, a 77-month low. This follows China’s decision to devalue its currency, the renminbi, close to 2 percent. For the first time in a year, the Shanghai Composite Index fell below its 200-day moving average.
  • Crude oil is on an eight-week losing streak, the longest in 29 years. West Texas Intermediate (WTI) slipped below $40 per barrel in intraday trading Friday, the first time it’s done so since 2009.
  • U.S. stocks are undergoing an ugly selloff. They just had their worst week since September 2011 and are on track to post their worst month since May 2012. The Dow Jones Industrial Average, down 10 percent since its all-time high, is nearing correction territory. All 10 S&P 500 Index sectors were off last week.

We can also add to this list the high levels of margin lending on the New York Stock Exchange (NYSE) right now. At the end of every month, the exchange discloses margin amounts, and it appears that everyone is leveraged. Real margin debt growth since 1995 is twice as much as real S&P 500 growth.

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Cartson Ringler is a market analyst and founder of Ringler Consulting and Research in Germany. Speaking with the Gold Report this week, he highlighted the precariousness of high margin debt in domestic equities:

We saw a huge bull market from 2009 to 2015 on the S&P 500 when it went to around 2,080 from 666. That market is really mature. One number that scares me is the high margin debt on NYSE. When the big market crash happened in 1987, we saw $38 billion in margin debt, but as of June 2015, NYSE margin debt was more than $504 billion. Everyone is dancing until the music stops. So I’m shorting the S&P 500, while building my basket of different precious metals producers.

Should the $504 billion—an all-time high, by the way—worry us, as Ringler suggests? Maybe, maybe not. It’s worth remembering, though, that high margin lending in China greatly contributed to the Shanghai Stock Exchange’s 30-percent correction just a month ago.

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In its Friday newsletter, Kitco made note of many of these market-moving events and said that “optimism in gold should spill over next week. A strong majority among retail investors and market professionals expect to see higher prices the last full week of August.”

The Contrarian Case for Gold Is Scorching Hot

Earlier this month I shared with you that hedge funds are net short gold for the first time since U.S. Commodity Futures Trading Commission data began in 2006. Being short has become a very crowded trade, and many contrarian investors have seized upon this bearishness to add to their gold exposure. American Eagle gold coin sales rose an impressive 124 percent in July month-over-month.

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Last week, famed hedge fund manager Stanley Druckenmiller plunked down more than $323 million of his own money into a gold ETF, according to second-quarter regulatory filings.

Druckenmiller is the guy who consistently delivered 30 percent on an average annual basis between 1986 and 2010, the year he closed his fund to investors. He’s also responsible for making the call to short the British pound in 1992, which “broke the bank of England” because it forced the British government to devalue and withdraw the currency from the European Exchange Rate Mechanism (ERM).

And now he’s made a huge bet on gold. The $323-million investment, in fact, is the largest position in his family fund.

Demand among global central banks and retail buyers has also heated up. As I told Daniela Cambone in last week’s Gold Game Film, the Chinese government is now reporting monthly on its gold consumption to offer greater transparency and convince the International Monetary Fund (IMF) that the renminbi should be included as part of the special drawing rights. Last month, the Asian country purchased 54 million ounces. And in the first half of the year, demand in Germany, the third-largest gold market behind China and India, increased 50 percent over the same period in 2014.

Gold in Russian Ruble Terms Shows The Value of Hard Assets

The Russian ruble, meanwhile, has lost nearly 50 percent of its purchasing power from 12 months ago, following its invasion of Ukraine and the drop in oil prices. Over the same period, gold has risen about 54 percent.

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It shows that when a currency loses value and falls out of favor, gold has tended to benefit as investors seek real assets. Gold prices have then been able to soar, just as we saw in the months following the financial crisis, eventually reaching an all-time high of $1,921 per ounce in September 2011.

Remember, Druckenmiller just invested heavily into gold. Prudent investors such as him understand the dynamic between fiat currencies and gold, and they adjust their funds accordingly. Does he predict something happening to the U.S. dollar that might benefit gold?

Druckenmiller might have 20 percent allocated to gold, but it’s advisable to have closer to 10 percent—5 percent in gold stocks, 5 percent in bullion, then rebalance every year.  This should be strongly considered whether the economy is soaring or struggling.

I invite you to head over to Kitco and compare for yourself the price of gold in U.S. dollars to other world currencies.