Gold: J-Day And Generational Lows

Tomorrow’s FOMC announcement is arguably the most important Fed event of the past 35 years. 

It’s a defining moment in Janet Yellen’s career, and so I’ve dubbed it as… “J-Day”!  The bottom line: Janet Yellen is going to attempt to raise interest rates without significant open market bond sales, something that has never been attempted. 

The Fed’s balance sheet has never been this large.  The sheer size of open market sales needed to raise and sustain higher rates now, would cause a major panic in stock, bond, and real estate markets. 

The debt-obsessed US government would also face massive pressure from open market bond sales, and could collapse. 

What’s critically important now is that Janet has given her theories a test run, but that’s been with small amounts of capital.  Nobody really knows what’s going to happen when she attempts to execute her rate hikes strategy with large amounts of money in the real world. 

So, my somewhat obvious suggestion is for US stock market investors to move to the sidelines until the end of the first week in January. 

The potential reward of a possible market rally over the next three weeks is dramatically overwhelmed, by the risks involved with Janet’s new and untried rate hikes experiment.

That’s the latest COT report for the mini Nasdaq stock futures contract.  Clearly, the smart money commercial traders are net short now, anticipating a sell-off in stocks.

What’s next for gold?  Well, a week ago, I predicted gold bullion would trade down to about $1157, before the Fed makes its announcement.  It went to $1058.

In the short term, whether gold begins a dramatic rally after “J Day” or not, will depend on the language used in the FOMC statement.

A potential inverse head and shoulders bottom situation may be developing.  Gold feels solid here, and there seems to be a wave of confidence sweeping through the Western gold community.  Just as citizens eventually rebel against oppressive leaders, the overly-bearish tone used by some gold gurus may backfire on them. 

Here’s why:  Stock market investors who bought value in the 1970s made a fortune in the 1980’s and 1990’s. 

Those investors never called any stock market bottom, but they bought into it, and made enormous profits in the following years.  It’s the same with gold now.  I bought gold and silver into the lows of 1976, but I never wasted a single moment of my accumulation time talking about a “bear market”.   

I accumulated gold and silver for nine years in the late 1960s and most of the 1970s.  I’d urge Western gold community investors to act in a similar fashion now.  Ignore the gold bear market label makers, and buy value, because making labels doesn’t make a gold investor richer. 

Buying value with the sole tool of intestinal fortitude is ultimately 99% of the wealth building game.

Oil has continued to decline, and it’s the largest component of significant commodity indexes.  Interestingly, Janet Yellen has referred to the decline as “temporary”.  That’s the daily oil chart.  Note the key reversal in play, and the “risk-on” Stochastics signal.  Oil traders may be anticipating a very bullish statement from Janet tomorrow.

Her rate hike experiment has the potential to reverse money velocity, give hope to savers, incentivize banks to put some reserves to work in the private sector, and pressure the US government to shrink itself.  Low interest rates benefit debtors, and the US government is the biggest debtor on planet Earth. 

Alan Greenspan and Ben Bernanke both engaged in a horrific strategy.  They essentially attempted to turn US citizens into miniature and severely undercapitalized banks.  They chopped bank interest rates and thereby “incentivized” the citizens to invest in large businesses, through the stock market.  That created a drop in temporary unemployment, and a surge in permanent unemployment. 

The Greenspan/Bernanke policy has been an unprecedented disaster for America.  The bottom line for any hope of a real US economic recovery on main street: QE can take a permanent walk, and rate hikes rock!

This may be the most important chart in the Western world.  Money supply velocity (M2V) collapsed as the Fed lowered rates to “incentivize” citizens to move money from banks to the stock market. 

During the 2008 financial crisis, the Fed should have revalued gold.  Instead, using QE, low rates, and excess reserve payouts, the Fed revalued the banks, and devalued the citizens of America. 

The good news:  Janet Yellen has dismantled QE as I predicted she would, and now there’s a 75% chance that she grabs hold of the money velocity bear tomorrow, and ends it too, with upside pressure on interest rates! 

That’s a snapshot of the latest COT report for the yen versus the dollar futures contract. Large FOREX players use the action of the dollar versus the yen as a key indicator for gold.

The banks have built a massive long position in the yen, and that’s great news for gold price fans!  That’s the daily chart of the dollar versus the yen.  The massive head and shoulders top pattern in play is in sync with the COT report, and also bodes well for gold!

That’s the GDX daily chart.  In addition to “J Day”, tax season is underway now, and will continue until Christmas Eve.  Despite these twin forces of negative power, GDX still has not penetrated its recent lows!  Gold stock enthusiasts need to buy now, and take a solid stake in what is destined to become generational gold stock lows!

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