The big move in markets overnight came in the gold market. Gold surged about US$15 an ounce, hitting just over US$1,340, the highest since April last year. You can see the strong rise in the chart below.
The timing is good. Yesterday, I recorded an update on gold and ran through a number of charts relating to the gold price.
In response to the move in the gold price, gold stocks surged. The HUI index, known as the gold bugs index, jumped more than 4.5%. There’s potentially a lot more upside for this index too.
It’s still trading around multi-year lows. But as I show you in the video update, gold stocks are starting to move higher, and may just be at the beginning of a very big move to the upside.
Another chart I showed, that doesn’t get much airplay in analysis of the gold market, is the relative valuation between gold stocks and the broader equity market.
The chart below shows gold stocks relative to the S&P500. As you can see, gold stocks look pretty cheap.
It’s important to keep in mind that most money managers, and certainly the ones running large portfolios, operate in a relative world. They don’t have the option of moving into cash.
Everything is relative. Stocks relative to bonds…this sector relative to that sector…
Right now, gold stocks are as cheap relative to the S&P 500 as they have been in a long time. In fact, the valuation is not far off the lows reached in 2000. This was the bear market low for gold and a bull market top for equities.
What’s driving the gold price higher?
So what’s driving the gold price higher?
It appears to be acting as a currency, or at least one not under the influence of idiotic central bankers.
We all know that the US Federal Reserve caved last month and basically admitted the US economy, as strong as it is, cannot handle higher interest rates.
Overnight — although it is hardly a revelation —Japan admitted the same thing. From Bloomberg:
‘In a rare explicit coupling of policy and the yen, Governor Haruhiko Kuroda said the Bank of Japan would have to consider additional stimulus if the exchange rate affected Japan’s inflation and economy.
‘He was responding to a lawmaker’s question about the BOJ’s options if the yen rose further. The yen fell afterward, trading at 110.70 versus the dollar at 1:29 p.m. in Tokyo.
‘Former BOJ officials have warned in recent weeks of more yen strength, saying there would be little the BOJ could do about it.
‘Speaking to parliament on Tuesday, Kuroda said the BOJ’s options included lowering bond yields and increasing asset purchases. He told lawmakers that currency manipulation isn’t a goal of BOJ policy, but Japan’s trading partners might not be convinced if the BOJ does act to offset a stronger yen.’
Do you think Japan’s problem is a lack of stimulus?
They’ve only been trying it for 25 years.
Sometimes gold cares about this stuff, sometimes it doesn’t. Right now, it seems worried.
That shouldn’t come as a surprise. The global economy has just gone through a strong growth spurt. In response, global central banks tried to increase interest rates. The economy didn’t like it.
The market now realises we are in a debt trap. There is so much debt in the global economy that it is ultra-sensitive to moves in interest rates. Central bankers are terrified of sinking their respective economies by normalising rates, so the alternative is to either do nothing or resort to more stimulus.
The other issue that Japan’s comments raise is the return of the currency wars. When global growth is strong, everyone gets a slice of growth and all economies benefit, more or less.
But when global growth slows, the pie shrinks. Countries resort to currency manipulation to ‘steal’ growth.
This of course shakes confidence, and capital looks for safe haven while this proven stupidity continues.
While there hasn’t been any overt currency war taking place, gold is starting to price in this likelihood, as it sees a global growth slowdown unfold this year.
But it’s not just about interest rates and currency shenanigans. The gold price also smells political turmoil. For starters, overnight, socialist lunatic Bernie Sanders joined the race to lead the Democrats in the 2020 presidential elections. I could easily put gold’s large move overnight down to that alone!
Then there is the ongoing scandal around the Deep State’s attempts to get rid of Trump, first by framing him for colluding with Russia to win the election, and then by trying to invoke the 25th Amendment to have him removed from office.
While the mainstream media are not reporting on this massive scandal (they are complicit), this issue isn’t going away. It could lead to political instability in the US this year as evidence of the massive sting operation is revealed through the declassification of a number of sensitive documents.
In short, there are a number of reasons why gold is rising right now. But keep in mind it needs to break out of its long-term trading range to trigger a genuine bull market.
Make sure you watch my video update for details of where this break out point is. If and when that happens, it’s off to the races for gold…
Editor, The Rum Rebellion