Sunday, December 17, 2017

Gold, Interest Rates and Super Cycles

When the Fed raised interest rates last December, many believed gold would plunge. But it didn’t happen.

Gold bottomed the day after the rate hike, but then started moving higher again.

Incidentally, the same thing happened after the Fed tightened in December 2015. Gold had one of its best quarters in 20 years in the first quarter of 2016. So it was very interesting to see gold going up despite headwinds from the Fed.

Meanwhile, gold has more than held its own this year.

Normally when rates go up, the dollar strengthens and gold weakens. They usually move in opposite directions. So how could gold have gone up when the Fed was tightening and the dollar was strong?

That tells me that there’s more to the story, that there’s more going on behind the scenes that’s been driving the gold price higher.

It means you can’t just look at the dollar. The dollar’s an important driver of the gold price, no doubt. But so are basic fundamentals like supply and demand in the physical gold market.

I travel constantly, and I was in Shanghai meeting with the largest gold dealers in China. I was also in Switzerland not too long ago, meeting with gold refiners and gold dealers.

I’ve heard the same stories from Switzerland to Shanghai and everywhere in between, that there are physical gold shortages popping up, and that refiners are having trouble sourcing gold. Refiners have waiting lists of buyers, and they can’t find the gold they need to maintain their refining operations.

And new gold discoveries are few and far between, so demand is outstripping supply. That’s why some of the opportunities we’ve uncovered in gold miners are so attractive right now. One good find can make investors fortunes.

My point is that physical shortages have become an issue. That is an important driver of gold prices.

There’s another reason to believe that gold could be in a long-term trend right now.

To understand why, let’s first look at the long decline in gold prices from 2011 to 2015. The best explanation I’ve heard came from legendary commodities investor Jim Rogers. He personally believes that gold will end up in the $10,000 per ounce range, which I have also predicted.

This means the 50% retracement is behind us and gold is set for new all-time highs in the years ahead.

But Rogers makes the point that no commodity ever goes from a secular bottom to top without a 50% retracement along the way.

Gold bottomed at $255 per ounce in August 1999. From there, it turned decisively higher and rose 650% until it peaked near $1,900 in September 2011.

So gold rose $1,643 per ounce from August 1999 to September 2011.

A 50% retracement of that rally would take $821 per ounce off the price, putting gold at $1,077 when the retracement finished. That’s almost exactly where gold ended up on Nov. 27, 2015 ($1,058 per ounce).

This means the 50% retracement is behind us and gold is set for new all-time highs in the years ahead.

Why should investors believe gold won’t just get slammed again?

The answer is that there’s an important distinction between the 2011–15 price action and what’s going on now.

The four-year decline exhibited a pattern called “lower highs and lower lows.” While gold rallied and fell back, each peak was lower than the one before and each valley was lower than the one before also...

- Source, James Rickards via The Daily Reckoning, Read More Here