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It’s been the golden summer of 2019 with the gold breakout through the $1350 hurdle it had struggled to jump over several times in the past few years. It didn’t just go through it slightly and then give all the gains back, this time it went right through $1400 and is currently a bit over $1500.
What fueled this move is that more investors are starting to realize the next moves by the Fed will be to lower and put pressure on the USD. They have cut rates by ¼ basis point so far and it looks like there are more to come. I thought it was a waste of time to do a ¼, it was only a matter of hours before many were calling for a ½ to a full basis point.
Folks need to be careful what they ask for, the fed doesn’t have too many of those kind of moves before they will be close to negative rates, again. Factor in inflation and we are pretty close to that now.
Interest rates aren’t the only factors driving gold higher. Central bankers are buying gold hand over fist, I guess they are realizing they better have some gold for backup. They have even reversed course on the 20-year old selling agreement with the European central bankers to coordinate their gold sales. No need for that anymore because they aren’t sellers like in the late 1990s, now they are big buyers.
In addition, the two largest economies in the world, US and China, are in the midst of a trade war. In one corner, you have “Tariff Man” Trump, literally acting like a school yard bully who thinks he can push everybody around. Then you have China which has no interest in being pushed around.
In the past, when China was more reliant on the US economy to sell its products, they likely would have folded already. Now that they have a substantial domestic economy and a pile of US debt and US dollars they aren’t so easy to push around. Bullies tend to pick on those they think are weak, it is a bad idea to consider China weak as they have plenty of ammo.
Ask the American farmers that are feeling the strain from China backing away from buying so much American agricultural products. I remember when the GOP was against socializing things, but they have moved to bailing out farmers so Trump can try to keep farmers that voted for him happy. Or at least not depressed. They certainly must be feeling some buyer’s remorse from helping to elect him.
Nobody really wins a trade war, yet, we have two sides that seem hellbent on not taking a step backward. Trump thinks he can bully China, and China won’t back down. This trade war is going to last at least until the next election, if Trump wins it will continue until 2024. Both sides are entrenched in their positions, I see no way for a quick solution. Trump won’t relent and the Chinese won’t give him a victory.
While this is happening, US debt is going through the roof, running over trillion dollar deficits during an economic expansion. The debt growth now, is as significant as when the Great Recession happened and they had to pump liquidity into the market. Then it made some sense, now it is utter folly that won’t end well.
The yield curve is inverted and suggesting that a recession is near, so the Fed lowered rates to try to show they see what is happening and are ready to act. Trouble is that even with all the stimulus pumped into the economy after the Great Recession, the growth wasn’t nearly enough for them to get back to more normal interest rates. They don’t have a lot of ammunition when it comes to interest rates.
As they lower rates, I certainly don’t think it is a one and done situation, it will put pressure on the USD. The USD is trading at pretty high levels, I would say it is priced for perfection. But, we are a long way from perfection so a lower USD is coming.
This is a very good scenario for gold, silver and other metals. Gold has already broken out, and the next to move in a big way will be silver, it is lagging, but will join the party soon as investors gain confidence in the gold bull.
There are several ways to play the golden bull market, one is to buy physical gold, another is to buy ETFs or mutual funds loaded with gold stocks, but my favourite is to find top quality gold stocks. In a gold bull market, the stocks will outperform physical gold, but buying a basket will give you winners and losers that are supposed to protect risk and also caps returns.
Stock picking the top names will outperform physical gold and the gold funds. I prefer to look for significant outperformance and have a strong group of picks for readers. Stay tuned for the next report, should be out in a day or two, that will give you a powerful gold stock shopping list.
All the best,
Allan Barry Laboucan
Allan Barry Reports
Advance Gold (AAX.V)
P.S. my reports are for information purposes only, before making any investment decisions it is important to do your homework and speak with your financial advisers.