McHugh’s Fearless Forecast For 2015, Part 2: Gold, Precious Metals And The US Dollar

Now that 2014 has closed, we want to present our view of where markets are headed in 2015 in a series of articles. Toward the end of this series, we will cover real estate and the economy, something slightly different than what we normally cover in our daily market reports to subscribers at www.technicalindicatorindex.com, but something you may find quite interesting. Let’s start by saying this: The year 2015 will be historic, with unusual events and high market volatility. Last weekend we covered the stock market. This weekend, Part 2, covers Gold, Precious Metals and the U.S. Dollar.

The Gold and Precious Metals Market

From a fundamental economic perspective, Central Banks are meeting every economic slowdown with more and more printed fiat currency, backed only by a promise to pay by each currency’s issuing Central Bank, not even backed by a sovereignty supposedly overseeing the Central Banks. This results in a hidden hyperinflation, as money is injected into world economies by purchasing interest bearing sovereign and private debt in exchange for new electronic paper currency, which keeps interest rates low while flooding economies with electronic cash that drives up prices for goods and services. This abundance of currency is finding its way into rising prices for necessities such as health care, food, housing, and travel. This is a major tailwind behind Gold’s projected upward price path.

Gold is a nearly perfect conductor of electricity, and is in high demand for technological gadgets and screen gizmos that are dominating the manufacturing world. That should continue.

There is coming a time when a superpower will see its currency fall so fast that it will have to prop it up by backing it with Gold. At some point, sovereign nations will begin to hoard Gold to protect themselves for such an occasion. Russia is a prime candidate for this right now. If I was running a major economy and my currency was collapsing, I would print my worthless paper and exchange it for Gold. If things got real bad, I would then back my currency with my vast tonnage of the precious metal and stabilize my economy.

The technical picture for Gold is shown in the next chart, the big picture for Gold. Gold is inside a huge Bull Market. The rally from 1999 through September 2011 was wave (1) up, a primary degree move, of a larger Cycle degree wave III up. The decline since September 2011 has been primary degree wave (2) down of III up. This decline looks like it is over. That means 2015 should see a rising value for Gold, slow at first since there has been so much psychological damage, however by the end of 2015, demand for the limited world supply of Gold should be rising, driving Gold sharply higher, with increasing upside price momentum over time, drawing in traders and speculators.

Silver and Mining stocks should follow Gold’s price pattern.

There is no stopping the rise in the price of Gold. As long as world Central Bankers continue to increase the quantity of fiat currencies, because Gold’s production is limited, a simple supply and demand equation predicts Gold must go higher. Demand for Gold is also increasing as it is a key component of technological electronic products, an increasing product line worldwide. 

The above mapping suggests Mining stocks have completed a 3-3-5 Flat pattern for corrective primary degree wave (2) down. Wave c-down of (2) down looks to have completed five subwaves lower, meaning (2) down has bottomed. Next should be the start of wave (3) up.

Mining stocks look to have bottomed, finishing wave 5-down of c-down of (2) down. Mining stocks should be starting wave (3) up, slowly at first, then will gain upside momentum later in 2015 as QE-5 (or QE 4, depending upon how you want to count the Fed’s stimulus programs) is announced.

Fundamentals suggest the cost of mining precious metals is declining due to the reduced cost of fuel. This bodes well for Mining Stocks.

With the Fed jawboning its intent to raise short-term interest rates in 2015, and its policy announcement that it has stopped QE 4 long-term Bond buying, coupled with announcements from Japan that it is embarking on its own QE program, and jawboning from Europe that Mario Draghi could do a QE program, and Oil declining (which is weakening oil producing nation economies), the Dollar has enjoyed a nice run higher compared to other world currencies. However, if we study the chart of the U.S. Dollar we see that the move from 2008 has been corrective, which means more downside is coming.

We believe the Fed knows that U.S. agency economic statistics about the real U.S. economy are bogus, and therefore is reluctant to raise short-term interest rates, and is reluctant to let the Dollar get too high, as a high Dollar will weaken U.S. exports, and will crush corporate earnings from companies who depend upon foreign sales that must be currency exchanged from those weaker foreign currencies back to the U.S. Dollar. The Fed knows that the U.S. economy is far too fragile to handle that interruption. The Jobs numbers are garbage. While statistics about jobs may have some quantity accuracy, they fail miserably in analyzing quality household supporting jobs growth, which remains weak. The proof is in the stock market, where every time it starts down, we see a fast powerful reversal that our PPT indicator and Demand Power / Supply Pressure Indicators suggest is rooted in deep pockets intervention, causing the upside reversal. The Fed does not want to let the stock market decline. Why?

A rising Dollar is death to foreign sovereignties that have issued debt in U.S. Dollar denominations instead of their own currency, necessary in many cases to attract investors, however, they will not be able to exchange their currency for Dollars as cheap as before and could default, which would cause a banking crisis throughout the world, including the U.S.

To the extent the Fed in its capacity with the PPT can temporarily stop market slides and create reversals, it means they see the real economy as a lot more fragile than the Central Planners are letting on. We see that the Dollar is overbought and at a place where many strong declines have started. How does this jive with market sentiment for the Dollar? If there is a race among international Central Banks to competitively devalue their currencies, each printing more and more of their currencies in an attempt to seek advantage over other currencies, it means all currencies that play this game will lose value versus real money, which of course is Gold.

While it is possible that if no stock market, economic or geopolitical catastrophe occurs in the first half of 2015, the Fed may raise short term interest rates a quarter point, we believe that such an action will have a boomerang effect, and slow this fragile U.S. economy, and possibly spook the market so much, that it will be a contributing factor, perhaps a co-catalyst with other events for the coming September 2015 stock market crash.

As a result, we believe the Fed could commence QE 5 by late 2015 after all hell breaks loose. This time the policy will be just as ineffective as before.  

The Euro looks to be forming a five wave sideways triangle, forming the pennant portion of a Bullish Flag pattern. The final fifth wave of this pennant triangle, wave e-down, is underway and should take the Euro lower.

Given that the weekly Full Stochastics are oversold, it is possible wave e’s middle subwave is about to start, wave b-up of e-down.

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Dr. McHugh’s book, “The Coming Economic Ice Age, Five Steps to Survive and Prosper,” is available at amazon.com at http://tinyurl.com/lypv47v

Robert McHugh Ph.D. is President and CEO of Main Line Investors, Inc., a registered investment advisor in the Commonwealth of Pennsylvania, and can be reached at www.technicalindicatorindex.com.  The statements, opinions, buy and sell signals, and analyses presented in this newsletter are provided as a general information and education service only.  Opinions, estimates, buy and sell signals, and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice.  Nothing contained in this newsletter is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision.  Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment.  Neither Main Line Investors, Inc. nor Robert D. McHugh, Jr., Ph.D. Editor shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided. Copyright 2015, Main Line Investors, Inc. All Rights Reserved.