Commodity Trade Mantra

Gold Prices Are Soaring Right Now – Here’s What’s Next

Gold Prices Are Soaring Right Now - Here's What's Next

Gold Prices Are Soaring Right Now – Here’s What’s Next

Negative rates go deeper, will they ever come ashore here in the U.S.? I wouldn’t put anything past the Fed in their attempt to revive the economy.

Well, she came, she conquered, she left. But, she’ll return today for an encore performance. Yesterday, I told you about the two scenarios that I thought were before Janet Yellen, and guess what? She borrowed from both!  Now that’s an economist for you. A two handed economist. You know they say “on one hand this could happen, and on the other hand this could happen”. She was all over the board yesterday, but in the end, she said nothing about stopping the rate hikes, instead choosing her words carefully, said that the Fed would continue to hike rates gradually.

Hmmm… does that mean the rate hike for March is still on the table? Does that gradually mean four more rate hikes in 2016? Or does it mean no more rate hikes until 2017? Gradually. Taking place, changing, moving, etc., by small degrees or little by little.

So, if that’s the definition of “gradually”, we can safely come to the conclusion that we still don’t know anything! For the record, I put down for all to read, late last year, that since the Fed had “broken the seal” on the rate hikes that they would go further with their rate hikes in March and June, and have a “Oh, No, what did we do.” But there was none of that to be seen or heard in yesterday’s testimony by Yellen.

There were some comments about the market turmoil, and so on, but I think she was just trying to throw the markets off the scent of what she was really saying. Which was… Oh, I give up! I really can’t say what her overall goal was yesterday, except to leave us all scratching our collective heads. But what I do know, is that I didn’t hear what I wanted to hear.

The geopolitical risk meter is flashing at us this morning, and trying to tell us something by having the safe haven assets on the rally tracks. Dollars, yen, euros, francs, gold and U.S. Treasuries are all firmly on the rally tracks. The euro rose past 1.13 yesterday, and remains well bid above that figure this morning.

Gold is up $26 this morning. That’s right, I said $26!  And the 10-year U.S. Treasury yield has fallen to 1.63%… I shake my head at this level for a 10-year bond. But at least in the largest bond market in the world, you can still carve out some yield, no much obviously, but some yield, while the rest of the world is dealing with crumbs. And some are dealing with negative rates.

Speaking of negative rates… Sweden’s Riksbank surprised the 50% of the 50/50 that didn’t think the Riksbank would move rates, at their meeting this morning. Recall, that I told you a couple of days ago, that I wouldn’t put it past the Riksbank to move rates deeper into negative territory, and that’s exactly what they decided to do, pushing their key rate to negative – 0.5%, from -0.35%…  the krona is getting whacked for that move, as well it should!

The Riksbank also had some tidbits to say, regarding their ability to use all the tools in their tool box to introduce inflation into the Swedish economy, and keep the krona from appreciating.  Here’s my thought for the Riksbank: you’re out of new arrows in your quiver, and all you have left are old, used, and worn arrows. You know, the ones you’ve used before, that didn’t work? You’re out of new arrows boys. So, quit with the tough talk about using everything in your toolbox.  You have nothing, nada, zilch, zero, to help your economy in that toolbox.

So, what lit the fire under gold?  Yesterday, I told you about how $1,200 seemed to be a roadblock for the shiny metal, and wondered how many times traders would attempt to overtake the $1,200 figure. But that’s all in the memory banks now, as gold has soared past $1,200.  I stopped what I was doing yesterday to log back into the currency screens to see how gold has reacted to Yellen’s testimony, only to find the shiny metal not in any mood to move higher. But it sure has changed its mind overnight!

You know, this is where I say something to the tune of fear of another global financial meltdown is gaining hold of the markets. Look at the safe havens. Japanese yen, which should be trading above 125, has a 111 handle this morning! And I just can’t get over that yield on the 10-year Treasury, 1.63%.

The price of oil has plunged once again, and this time to a $26 handle. OUCH! I read a report on the MarketWatch this morning that talked about how the cheap price of oil was going to bankrupt countries like Saudi Arabia and Russia. They contend that even the Saudis can’t deal with $20 oil, which is where they feel the next stopping point for the price of oil will be.

Also helping the price of gold rise higher this morning is the latest report from the World Gold Council (WGC) who noted that gold’s largest customers, China, India, and Russia will all be adding to their stockpiles of physical gold this year, and then went out of their way to make mention of the global stock market turmoil, and how that should be enough to gold demand strong this year.

The WGC is good at telling us the obvious stuff, but sometimes they have something for us that’s new. And here’s the something new from the WGC. “Demand for bars and coins in China, the largest single market, jumped 25% in the fourth QTR from a year earlier, and was up 21% for the year, with currency weakness the main driver.”

Well, I would say that’s all fine and good, but the main currency that gold is concerned about is the dollar.

Yesterday morning, the risk meter wasn’t flashing a warning signal, and that helped the Aussie and New Zealand dollars, respectively, but today is a different story, and that doesn’t bode well for the currencies of these two countries. Initially, after the Yellen testimony yesterday, the markets felt that Yellen had given them a “bat signal” and that rates would be delayed. This thinking, got the Aussie dollar (A$) and New Zealand dollar/kiwi both excited. But that euphoria was quickly eliminated. And for today, both currencies are sitting with losses vs. the green/peachback dollar.

It’s difficult for me to have to say this, but the Japanese yen is the best performing currency since yesterday morning, except for gold that is! Bank of Japan (BOJ) Gov. Kuroda has to be tossing and turning all night. This could become a real tug-o-war between currency traders and the BOJ.  I’ve always told you that the markets have deeper pockets than any one Central Bank, but that doesn’t mean the BOJ, and Kuroda won’t go down fighting! Then we’ll really have some perverted currency markets, folks. Countries that have done just about everything to weaken their respective currency, are seeing their efforts wasted, as the safe havens kick in, and countries that have strong fundamentals and should have stronger currencies are seeing that scenario being turned around.

A currency that I don’t talk about much, the Mexican peso, has really lost a lot of ground to the dollar in the past year, losing more than 21% in the last 12-months. I’ve long said that the peso needs to have a high interest rates, a risk premium if you will, to help protect it against not just slides like this, but also the memory of past indiscretions the Mexican government took with foreign investments. A lot of people believed that once the U.S. Fed started hiking rates, that Mexico would follow lock-step with the Fed. But that didn’t happen, and it won’t either.

Anyone for a trip to Cancun? Mexican pesos exchange rate is your friend, even though the water might not be! HA!

Still no economic data to speak of from the U.S. Data Cupboard today, although we will see the Weekly Initial Jobless Claims, that used to be important to the markets, but has now seen the markets move on to some other data. January Retail Sales tomorrow, to end the week. and what a long week it has been so far! Next Monday is the Presidents Day Holiday, so a three-day holiday weekend for the U.S.

I told you a few days ago, that China is on holiday all week for their Lunar Year Celebration. A three-day weekend used to sound pretty good to us here in the U.S. but when we found out about how long these Chinese celebrations last, we wanted more. HA!

Well, believe it or don’t, but I don’t have anything here for you today. I’ve seen lots of stuff on the Fed, but most of it gets downright nasty and ugly with what they say and I don’t need that aggravation, especially on a day when the fog hasn’t lifted yet. I was all prepared to further our discussion about the credit expansion falling apart this year, but we had “technical problems”. So, I wanted to at least tell you that three of the top five economies in the world, have seen their credit expansion “roll over”, which means stop expanding, with only the U.S. and China still expanding. And if and when they “roll-over” things could get quite ugly.

That’s it for today.




Courtesy: Chuck Butler

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