Gold on Hold
There are three ways prices can go. Up, down or sideways. It’s evident now that gold prices are failing to follow through with new all time highs – let’s look at the why. First up, a chart in WEEKLY time frame showing the US dollar caught in a range. The lower side shows increasing support as the 2018 lows served as support, with 2021 putting in a higher low. That is to say, the dollar buyers are buying the dip. A primary reason for this is because the Federal Reserve, unlike the European Central Bank, never imposed negative rates. That continues to attract capital to the USA. A stronger US dollar does nothing to help the price of gold.
Acknowledgement of these dollar inflows came in the most recent – and final – Fed policy meeting for 2021. Quoting from an economist and market trader whose knowledge and judgment I trust:
Powell was asked at a news conference Wednesday what specifically had caused the Fed to pivot to a tighter credit policy. He said:
“It was essentially higher inflation and much faster progress in the labor market.”
The key here was that Powell acknowledged the possibility that inflation WILL NOT decline as expected next year. This is because the Fed is now realizing that Europe is doomed and the real risk here, besides the shortages, is that there will be a massive capital flight to the dollar.
“There’s a real risk now, that inflation may be more persistent and that may be putting inflation expectations under pressure, and that the risk of higher inflation becoming entrenched has increased. I think part of the reason behind our move today is to put ourselves in a position to be able to deal with that risk.”
The Last Refuge – Uncle Buck
The red box in the graph above illustrates the upper area of this recent price band that the Fed has been defending. That will no doubt continue with the increasing demand from global capital. A strong dollar doesn’t serve domestic trade policy. This is especially the case in a global trade regime destabilized by the politics of Covid. Such are the backlogs of container ships in Californian ports now that Asian shippers literally refuse to take American products on their return leg. This is not an economic environment that is congenial to a strengthening US dollar. While the graph above is showing resistance at present levels, we can anticipate further strengthening of the dollar. Why?
Again, the following passage is worth sharing:
This is effectively declaring war amounting to a sharp policy shift in contrast to the other central banks pleading with the Fed not to raise rates. Powell also said that he will shrink its monthly bond purchases at twice the pace it previously announced, ending QE altogether in March. You MUST understand that the US is the ONLY place for capital to flee and Powell is staring international capital flows straight in the eye.
History Repeats
History repeats, because human nature never changes. Living in Europe for nearly 20 years I watched the Euro project begin in 1999 and then crumble post-2009. Money was taxed as interest rates were pushed into negative. When we sold our flat and returned the money (which the bank created out of thin air when we had the loan approved) they charged us nearly 2% over and above the outstanding amount. They didn’t want the money back, because the Swiss National Bank was deflecting capital inflows into safe haven Switzerland with negative interest rates. When the banker told me this, I turned to my wife and said “this is nuts!”
A similar pattern played out in the Great Depression. Austrian banks failed circa 1925 and European capital fled to the USA, fueling the stock market boom, followed by the stock market crash. Herbert Hoover wrote the above passage in his memoir. It relates to the same issue we’re seeing today in currency, equity and debt markets, along with private assets like real estate. Investors are looking for a return on capital, but also the return of their capital. The poor outlook for Europe is setting off another flight of capital to more secure markets.
The Outlook For Gold
So what’s the outlook for gold? It could tread water or – in American dollars – pull back a good 20% to support levels indicated below. That’s a worse case scenario at this time. Gold will have its day in the sun, but prior to that there’s going to be an almighty run on the US dollar. Fed Chairman Powell recognises that the US is the only market left to absorb the trillions of dollars of debt sloshing around the world and looking for security. China’s out; the EU is out; Japan is out. There’s no other major market left.
This is the reason I never traded bullion gold. It’s price fluctuations are dependent on the American dollar and fear. When the market truly fears the next GLOBAL crisis, gold will have its day. However, the collectables market in scarce gold coins has gone from strength to strength since 2019. I’d expect the potential for a lull in the action as capital flees Europe. EU governments closed off their citizens ability to buy gold in any meaningful amounts some years ago. It’s not a market that I expect will assist prices at this time.
With the Fed lifting rates, global investors can expect a more meaningful return on their capital in US Treasury bonds. That’s where Powell will need to direct capital flows to help cool down an overheated real estate market. Equity markets have also been running hot as investors seek capital gains and dividends to compensate the lack of returns paid by banks. Directing capital to US Treasuries may also cool stocks.
Breath In, Breath Out
I started collecting gold coins back in 2018, when it became clear to me that gold in AUD was about to make a significant advance in price. The chart below illustrates the utility of technical trading using market setups – in this case a massive ascending triangle. It is not a coincidence that all my understanding of the world has been changed by the Orient. The candlestick chart below was developed by a Japanese rice trader to help in the understanding of price movement. From Aikido I learned that flowing with the energy of one’s opponent is infinitely easier than using force against force. Markets – like humans – breath in and then breath out. That’s the Yin and Yang symbol we see everywhere – the never ending cycle of life that dictates everything, including the climate change we are presently witnessing on this earth.
The chart was annotated above as I suggested that support would hold at $2200 AUD – as it did. While the price of gold is keeping just shy of the all time high, one has to ask what next for the Australian dollar? China is riddled with bad debt. What if it no longer needs as much of the raw materials Australia has been exporting for the past decade? Well then the Aussie dollar is quite possibly heading back to test the lows at .60 cents. Perhaps even 50 cents becomes possible. That will continue to push XAUAUD through to new highs. However, until the market denominated in American dollars gets serious about buying gold, we’re not going to witness serious action. The finale is still some years off. In the meantime, take a breather – I certainly am.
Gold is NOT an Inflation Hedge
Lastly, take a look at the following chart. Next time you see a talking head commenting that gold is moving on inflation expectations, just laugh. Gold has never been an inflation hedge. It’s a hedge against bad governance. That is what is unfolding globally right now.
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