Rate Hikes And Gold: Bring It On!

In the short-term, gold and related items have a rough general tendency to decline into the US jobs report…and then to rally in the days (and weeks in some cases) following the release of that report.

That’s the daily chart for Barrick, and it’s rallying nicely, on “post jobs report cue”.

There’s a beautiful inverse head and shoulders bottom in play, with the decline ahead of the jobs report creating the right shoulder of the pattern.

A three day close above $8.50 is required now, to launch Barrick towards my $10.40 area price target.  All of Barrick’s technical lights are green, and the company has dramatically reduced debt and AISC (all-in sustaining costs). 

Barrick often acts as a “lighthouse” for the entire gold stocks sector.  It’s clearly forecasting very smooth sailing ahead, for most gold and silver mining stocks!

That’s the daily chart for gold.  I recommended shorting some gold in the $1170 - $1190 area, as my key 14,7,7 series Stochastics oscillator became dramatically overbought in the 90 area.

Investors should be covering a solid tranche of those positions now.  Watch the short term trend line I’ve highlighted on that chart.  An upside breakout appears imminent, and the Stochastics oscillator is now massively oversold, with the lead line sitting at about 3!

The decline into the jobs report was intense for two reasons.  First, El Nino caused rainfall in rural India to come in at about 86% of normal.  That meant farmers had less money to spend on gold.  

Regardless, it’s the big picture that matters.  The world price of gold could be driven dramatically higher, if Indians become comfortable with buying gold online.  Online gold sales have been tried in China, but with only limited success. 

Any company that succeeds in making Indians absolutely comfortable with buying gold online would probably have an effect on the price of gold that is second only to a US financial system implosion.  The shocking online demand growth statistics in India, released by online sales company Amazon this morning, suggest that such a situation may be much closer at hand than most analysts realize.

The second reason for the recent price decline is that gold tends to sell off with significant intensity, ahead of a rate hike by the Fed.  The combination of El Nino and the Fed rate hike preparations were a potent short term headwind for gold.

The good news is that the US dollar typically tends to decline, right after the first rate hike in a tightening cycle.  If Pete Fay is correct, and I think he is, the US dollar is poised to begin a significant sell-off in early January, following the Fed’s first rate hike at the upcoming December meeting.  That’s fantastic news for gold price enthusiasts around the world.

Most analysts that think rate hikes are coming, think so because the US economy is improving.  In stark contrast, I argue that rate hikes are coming because the economic upswing has been anemic. 

Low rates have pressured savers to pull money out of banks, and gamble their savings in “risk on” markets.  That’s created an implosion in money velocity, and while there’s no guarantee that rate hikes will reverse that velocity, the policy of forcing savers to gamble has been a complete disaster.

Government size and red tape have grown exponentially as rates have stayed low.  If rates go any lower, money will pour out of government bonds and into mattresses, making an already horrific situation “beyond horrific”. 

It’s up to Janet Yellen to fix what Alan Greenspan, Ben Bernanke and US congress have ruined, and I think she will finally begin to do so, starting on December 16^th.

As commodity index expert Jodie Gunzberg notes, energy comprises a staggering 70% of many indexes, and there’s a key divergence taking place now, between energy stocks and energy bonds. 

As the dollar declines when the Fed hikes rates, energy should rise nicely, bringing a new wave of institutional interest to the entire commodity sector.

Regardless of what happens in America, the global price of gold will ultimately be carried onwards and upwards, by the gargantuan love trade in India, China, and Dubai.

Dubai’s gold industry moves about $20 billion USD of gold each year, and demand is growing at a solid 8% pace.  In contrast, global mine supply is floundering at 3% growth in a good year, and seems destined to flat line.

Silver jewellery is also becoming popular, especially in India, where demand is skyrocketing.  That’s the daily chart of the key SIL-NYSE silver stocks ETF.

This decline, caused by the jobs report, was “technically necessary”.  It created the right shoulder of the significant inverse head and shoulders bottom pattern.  That is now in bullish play.

Note the action of the 14,7,7 Stochastics oscillator, at the bottom of the chart.  The lead line is hooking up nicely.  Interestingly, this is occurring while many frightened analysts draw huge arrows on their charts, to dramatically lower prices. 

I expect the next COT report to show that major banks have been significant buyers into this decline.  I would suggest that all silver stock enthusiasts need to take buy-side action, and do it right now!

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