Rate Hike Implications For Gold Stocks And Dow Index

The world is about 24 hours away from key BOJ and Fed meetings that could create a sea change in global markets.

This daily bars gold chart shows gold drifting majestically in a rectangular pattern.

Strong handed gold investors don’t appear to be worried about the BOJ and Fed meetings, and with good reason; a rate hike from the Fed would create panic in the stock market, and investors would flock to gold, just as they did after the first rate hike in December.

If the BOJ announces deeper negative rates, that’s also good news for gold, from a competitive cost of carry perspective.

If the BOJ announces “operation twist”, where it buys more short term bonds than long term bonds, institutional money managers will view that as inflationary because it boosts bank lending. That’s more good news for gold.

Indian festival buying is also now in play, and demand is likely quite a bit higher there than official numbers indicate, due to the rise of the black market’s share of the market. 

That festival demand is likely a big reason why gold feels so firm.

When the Fed hiked rates last December, gold stocks and the US stock market sold off temporarily, and then a huge rally began.

If the Fed hikes rates tomorrow, I would suggest that both the stock market and gold stocks will fall again, but it’s likely that only gold stocks recover quickly this time.  The bottom line:

It’s possible that a rate hike tomorrow marks the end of the US stock market bull cycle. It has really been treading water since early 2014, when Janet Yellen began tapering QE.

This monthly bars chart of the Dow shows an ominous broadening top formation may be forming, as the RSI oscillator negatively diverges.

This is the daily bars chart of the Dow. 

From a technical perspective, it’s a horrific situation. There’s a Head&Shoulders Top pattern in play. It’s similar to the formations on the gold stock ETFs, but it sits within a huge bear wedge formation.

What about gold stocks?  Sadly, Indians don’t buy gold stocks for their festivals.  They buy bullion.  Gold stocks looked a little shaky recently (with some great exceptions), when global stock markets fell after key Fed representatives spoke.

I generally mandate myself to a 30% gold stocks limit for my portfolio.  I realize that many gold bugs like to hold much higher amounts of capital in their favourite mining stocks. 

Significant intestinal fortitude is required to operate with a “go big or go home” approach to gold stocks, but the potential rewards are gargantuan.

This is the daily bars GDX chart.

Technically, GDX has a head and shoulders top pattern like the Dow, and the same pattern has appeared on the GDXJ and SIL entities.

Gold stocks can be viewed as a canary in the Fed’s coal mine. Consequently, it makes sense that a rate hike could bring some pain to gold stock enthusiasts around the world.

Regardless, I think that pain would be very temporary, and I’m in some great company in my view. 

This is a truly spectacular summation of the gold stocks sector in the “here and now” time frame - and it comes from Goldman Sachs’ highly influential research team.

The bottom line is this: Fundamentally-oriented liquidity flows from institutional money managers create the chart patterns that technicians see on their charts, and one rate hike from the Fed cannot undo all of the balance sheet repair work that gold mining companies have achieved.

While the H&S top patterns and infrequent rate hikes from the Fed need to be respected, the ability of most productive gold mining companies to generate 5% - 8% free cash flow yields for many years is something that commands vastly more respect.

It’s going to be an action-packed day tomorrow.  I invite all gold stock and silver stock enthusiasts to cast fear aside now, and join myself and top Goldman analysts in placing buy orders slightly below the current market prices, in preparation for tomorrow’s BOJ and Fed announcements! 

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