For us, the only thing that matters now is how Gold reacts to the next rate cut. While Gold bulls have been dancing the jig, or whatever dance that is appropriate for those celebrating, we'd like to make a case for why you should be worried. We'd also like to explain what we feel is the next key moment to help discern if Gold has shaken off the shackels of misguided manipulation and ignorant paper investors.
HEY WHAT GIVES? WHERE IS THE LOVE?
Bull Case Continuation
As we stated HERE last night, we have a macro bias towards the yellow metal's continued rise to the heights it deserves of $2000+. If you were to back every USD in circulation that would put Gold at approximately $10,000 per ounce. Will that happen? Dont be silly... ok be a little silly! You'd be buying your deli sandwiches with glocks instead of Gold coins if Gold hit $10k overnight. The reality is, if Gold were to back the Dollar, it would rise considerably, but not without some Fed "management" like:
- a lessening of the USD float,
- a government intervention in the form of taxation,
- cash settled futures (force majeur)
- Liquidation Only (1987 Silver and the Hunt Bros)
- or some other unthought of way to keep faith in in our men behind the curtain controlling the FIAT levers
To be fair, Gold has benefitted from the Brexit chaos. It also will benefit much more in the longer term from the Central Bankers' lack of clothing and their failed corporate sponsored central planning schemes.
BULLISH- Negative Bond Carry
Bonds are setting the tone for more investment in Gold. Opportunity cost in holding Gold in many currencies is at ALL TIME LOWS, and getting lower. There is negative carry in holding bonds of several nations. This makes the opportunity cost argument of holding Gold a joke.Especially when you can lend physical Gold out for a fee.
BULLISH- USA NIRP is Here in All But Name
In the USA, the 10 year bond is hovering at all time highs. That puts the yield just above all time lows of 1.38%. The Fed has not announced a move towards NIRP yet, but we are already effectively trading there in money markets. RecentlyTIAA-CREF, announced it can no longer waive fees on its money market funds.
End of the Voluntary Expense Waiver for CREF Money Market Account- (emphasis ours)
Separately, TIAA will end the voluntary expense waiver for the CREF Money Market Account by April 14, 2017. Since 2009, TIAA has been voluntarily waiving expenses incurred for services provided to the CREF Money Market Account to help avoid a negative yield on the Account in the prevailing low interest rate environment. After extensive discussions with the TIAA and CREF boards and our state insurance regulator, it was determined that that the waiver should be ended. It is anticipated that after the waiver ends, unless interest rates rise sufficiently, one or more classes of the CREF Money Market Account may have negative yields.- Source TIAA.org
NIRP is already here folks.
All this is playing right into the case for a continuation of Gold's rally. But we, like many of our experienced readers are circumspect. We know how easy it is to spoof Gold lower. Even the less paranoid among us know that Gold is much less liquid than the USD as a safe haven. This creates exit liquidity issues. We've been burnt too many times by hot, speculative, money front-running the exits and distorting the market while increasing volatility. So please allow us to present the Bear case before giving what is the next "Tell" for Gold's continuation higher.
Why Gold Investors Should Be Worried
While you may have heard some of this before, we are confident you have not heard all of it. This is intended to help Gold investors and speculators keep a cool head in the volatility that is upon us.
I Have Seen the Enemy, and the Enemy is Faith in the Dollar
Source- Kitco.com
In the chart above, Gold rallies, but from lower levels than before. The Dollar sells off, but from higher levels than before. Are you telling me that fear of Grexit was bigger concern than the UK Referendum to Leave the EU? C'mon. Dollar weakenss in 10...9...8..7...
- Brexit is Worse than Grexit- yet we are nowhere near the alltime highs that occurred during that crisis.
- US Bonds are near all time lows- and Gold is not anywhere near all time highs. This is a non confirmation of the rally in our books
- The USD is far more liquid a tool for risk aversion than Gold. We feel that those institutions that bought Gold as a hedge during the Grexit crisis got burnt on exit. As a result, they are less likely to put money in Gold and more likely to pick the USD as their safe haven. The chart above says as much. Maybe they buy some calls, but they want defined risk now. Which brings us to 4.
- Option Behaviour- this is a poorly understood way of measuring market sentiment and is often interpretted the wrong way by market participants
- The options market has recently flipped from a put skew to a call skew. This means Out-of-the-Money calls are trading at a higher volatility than their equidistant cousins on the put side. Bullish? NO. Not Necessarily. It is merely a "tell" who the dominant player is in the markets.
- It means that hedgers are not in the market like they were. It also means that bullish option speculators are dominating the market. And option speculators buying calls are not deep pocketed players. Translation, they dont have enough money to buy futures, so they punt with options/lottery tickets. It is not a bullish sign. It is a sign of absent hedgers. If you believe Gold is money like us, then it should be trading in a Put or flat skew like its competing currencies do.
- Especially given how miners have a poor to middling track record for hedging/not hedging at the right times. (Ashanti, Cambior, BOE, Anglo Gold in the 1990s)
- Miners should always be hedging. If they are worried about their stock participating in a rally, there are ways to handle that without risking their operation's cash flow.
- Miners should be selling the crap out of calls or hedging their production in the futures market. They should not be punting long to ensure their own stock options perform. They are businessmen in Gold, not Gold speculators in business.
So be bullish but be aware. We all see what we want to see sometimes. For this market to have a sustainable rally, it must be calm and not over-reacting to events like Brexit. It will remain strong because of the continuation of failed policies by central bankers. We believe this whole heartedly. On that note, here is what we think is the most important pulse check on the Gold market coming. The next Fed announcement.
The Fed May Cut Rates Again
If they do how Gold behaves will tell you what the market's perception is
- Does Gold rally or fall when the Fed next lowers rates?
- IF RALLY- this is because the market sees that there will be little to no boost to risk markets like stocks, and are starting to focus on the debasement of the USD. To us, this is the sign that the "unintended consequences of Fed Policy are bigger than the desired effect. BOOM GAME ON
- IF FALL- then the market still believes in the powers of OZ and their ability to levitate stocks making Gold not needed yet as a safe haven. Just not Gold's time yet.
It is that simple. But it isnt that easy sadly.
Don't be a Muppet. Invest in Gold, dont trade it. Leverage is for losers when it comes to monetary safety.
UPDATE 12:44
Sure enough, Bloombergs Narayana Kocherlakota just posted an article saying the Fed should ease:
- Britain's vote to exit the European Union and the reaction in global markets offer important lessons for the Federal Reserve. It should be easing policy in the near term. -BBerg
Thats what we want to hear boys. Print those dollars. Give Europe USD Swaps to ease their liquidity issues. It's all good. More of the same medicine that is causing the disintegration of the EU is what we need...
- Soren K.
Read more by Soren K.Group
