I’m sure you’ll agree, right now, we live in an “Uncertain” world.

And Uncertainty is an important part of our jigsaw. Something which is good for gold. But I’ll get on to that later.

With uncertainty, I think there is a certain amount of fear and how we manage that fear on many fronts is vital. But today I want to talk about investing.

I don’t think there’s a huge difference between stress and fear. One thing I do know is stress is not good for your health and living in fear can’t be that good either.

Fear and stress often lead to poor decision making. They seem to jumble our minds, leading to poor choices. I’m sure we’ve all had moments when a child, a pet or even a good friend or family member has been driving us mad and we’ve basically lost it. I’m not talking about shouting or screaming – but being incapable of completing the most simple of tasks. Like putting something in the fridge that really shouldn’t be there! We’ve all done it – at least I hope so!

My point being that under real stress we probably won’t function very well. So you need to prepare for times when your life may be stressful – in advance. In our day to day lives this could be booking a holiday or getting away from the kids for a few days. But you should also plan your investments as well. Rainy days will happen and it’s best to have done your thinking before stress jumbles your mind.

Before we go any further I’d like to show you two graphs. The first is US Treasury Yields going back as far as I could. As you can see, 5, 10 and 30 year treasury yields are close to their all-time lows. Remember, the lower the yield, the higher the price. So bonds are already trading at very high prices relative to where they’ve been.

The second graph is US equities. Here is the S&P index over the past 100 years. Again, it shows an asset class trading at all-time highs.

But it’s “uncertainty” that I want you to think about today.

People tend to like certainty – it’s a good thing. So logically, uncertainty must be a bad thing.

But is it?

It can be. But if you’ve already got at least some of your investments in an asset class which typically does well in times of uncertainty. That must surely be a good thing.

Looking at the world today, you don’t have to look very hard to see uncertainty, stress and fear. In times like these people typically move to bonds and cash. But this time could be different.

Why?

Firstly, any cash sitting in a bank is likely to lose “value” thanks to inflation exceeding whatever paltry interest you’re able to earn. There’s also the much smaller risk of the bank defaulting.

Secondly, with bond prices already so high, is it really safe to move into them now? Like your cash balance, you could well see inflation erode their value and there’s also the chance of seeing your principal tumble if bond prices fall – which they can.

What are we so uncertain about?

Where do I start?

Trump seems to be on a lot of people’s minds at the moment. So let me start there.

He’s a maverick.

Some say a businessman and not a politician.

Now that may be a good thing. We don’t know. What we do know, is, somewhat ironically – that we don’t know a lot. There’s huge uncertainty about not only what he plans to do. But also how he plans to do it.

Will he build a wall across Mexico? – Surely bullish for silver prices

Does he want a weak US dollar? – Bullish for gold

Is he going to spend vast amounts on infrastructure? – Bullish for gold

Right now, we don’t know. We can only play with the cards we’ve been dealt, when trying to protect at least some of our capital if things get messy.

With that in mind, let me show you a few graphs that may reassure you that by investing in gold, you may be doing the right thing.

Firstly, this is what happened to gold when the Dow tumbled 28% in 1977-1978. It went up 92%.

More recently there was the crash of 1987 when the Dow fell 39% and gold was up 8%.

And finally this is what happened in 2008/9. The Dow fell by 32% and gold went up 44%.

Now remember, gold miners have leverage to gold. If the gold price goes up, I’d expect them to go up more. A lot more.

Perhaps you’ve already got at least some investments in the mining sector. In which case, then if, and of course there’s an if – we have a “correction,” you won’t need to panic, because you’ve already positioned at least part of your portfolio for what could be challenging “uncertain” times.

When everyone else is in a state of extreme stress and fear, hopefully your investments, or at least some of them, will be doing just fine.

To see which gold mining shares Simon recommends buying today take a trial of our Gold Speculator service here

The post “If you expect the worst – you’re never disappointed!” appeared first on The Daily Reckoning - UK Edition.

• Which camp are you in?
• Why technical analysis works
• PLUS: A head and shoulders in gold

As I was saying yesterday, when it comes to technical and fundamental analysis, I like a bit of both. That’s certainly the case when choosing overall direction – i.e. do I want to be long or short?

But for actual trade entry and exit – what we call timing – it’s the charts that lead the way.

And today I thought we should take a closer look at why technical analysis works.

There’s a bunch of people out there who say it doesn’t work. They say it’s all mumbo-jumbo – and that looking at charts is just looking at history and trying to ‘guess’ the future.

Well, as I explained yesterday, that’s kind of true. At least the history part is – I wouldn’t say ‘guessing’ is fair, though. It’s more measured analysis, using previous price action and reaction, as a guide to where it could go in the future.

Here’s a bit about what I said yesterday (and then we’ll go a little further):

“…chart analysis gets mocked by some people as ‘dark arts’ and ‘self-fulfilling rubbish’. Some try to write off technical traders, saying all they have to go on is history.

“Well that’s exactly it. It’s one of the premises technical trading is based on:

“History repeats.

“Not necessarily exactly. But price often follows patterns that have happened before. And often those patterns happen again. That’s an opportunity to make money.

“And I know plenty of traders who make a killing out of using historical charts to predict where price should be heading. And buying or selling accordingly.

“For now, there are a couple of powerful, undeniable concepts I want to touch on that technical traders use to make money.” [You can read the rest of that article here.]

Now I don’t know which camp you’re in?

Are you a pure chartist or are you chart-sceptic and prefer to focus on the fundamentals (economics, central bank policy, company accounts, etc.).

Or maybe you’re like me and use both types of analysis to spot your trades (and fine-tune your entry and exit)?

But today I want to delve a little more into why I believe technical analysis works – and when it’s useful.

If you’re a chart fan, I hope what we’re going to look at chimes with you. And if you’re a little sceptical, perhaps, at least, it’ll provoke some thought. Maybe you’ll consider looking into technical analysis some more.

Why does technical analysis work?

It’s all about price action – where the price has been before – and how it is displayed on the price charts. Price charts are simply pictures of where the price has been in the past.

The reason it’s useful to look at a chart is that you can see levels where a rising price has stopped and reversed (resistance) or a falling price has stopped and reversed (support).

And it’s this support and resistance that forms the basis of technical analysis.

Knowing that price has reacted in this way in the past, traders will mark lines on their charts at those levels. And if a lot of traders are doing it, these lines can be rock solid – you can map your trades with them.

Here’s a daily chart of USDJPY (dollar/yen) taken yesterday:

Source: IG.com

Technical traders can look for price approaching those levels to work out trades. It may be that they look for the price to reverse at that support or resistance level. See how price has often reacted at those levels that have been significant in the past.

Or you can look to enter a trade if the price breaks through what was previously support or resistance… and continues.
There are strategies for both. And there are also established chart patterns that we see time and again which are great for picking out trend reversals or continuations.

These patterns have a great track record for spotting decent big moves. And I want to show you what I mean with one of the most powerful reversal patterns, called the head and shoulders pattern.

As I often say, it’s better to trade with the trend than against it. Following the trend is (as Jesse Livermore put it) the line of least resistance.

So you should trade with the trend as long as you can – and get out when you have confirmation that it has ended. That’s the best way to make money on big moves.

The thing about the head and shoulders is that you’re looking to get into a new trend – once you’ve had confirmation.

You aren’t trying to nail the start of the new trend. You want a clearer, more convincing trend to trade – so you miss out on the first part and wait until it is more established.

That’s OK. Because often, these patterns have a long way to run after you get the confirmation.

To show you what I mean, here’s a chart I found. I’m not sure what it’s of – but it’s a typical one and so a good example to show you what the head and shoulders pattern looks like:

The key thing about this pattern is that once you have confirmation of the trade being on (breaking the neckline) they tend to move the same distance as the height of the pattern from the top to the neckline.

Why is that? I’ll go into further detail with some more examples soon… and as always, I’ll be keeping an eye out for specific trades using these patterns. To get those specific trade ideas, upgrade to Profit Watch Pro.

Here’s one I’ve been looking – it’s on the four-hour chart for gold priced in dollars:

Source: IG.com

It’s not perfect. But it’s got the right combination of falling peaks that indicates a possible trend change.

Note how since price broke down through the neckline, it then came back up to test it… before resuming the move lower. That’s another familiar characteristic of these patterns.

I’m not trading this but let’s see how it plays out as an exercise. If that red support line around $1,220 gives way, then the $1,203 target is in the crosshairs.

At that point the price may find a bit of support. If it doesn’t, there may be even further to run on this down leg for gold.

I respect your privacy and will never pass on your email address to anyone else.

The post Why a break of this line could trigger a move down for gold appeared first on The Daily Reckoning - UK Edition.

Practically everything that could have been said about gold has been said.

You know that the market bottomed around the year 2000 at around $250/oz.

It soared to around $1,000 by 2008. Then it crashed in the general asset price collapse, that year, to around $700.

But then it soared again in the post-recession reflation to over $1,900 by 2011. (Silver, by the way, had even larger movements, in percentage terms).

Then, as long term holders know only too well, it crashed again to around $1,050/oz by January 2016.

Over the last 14 months it has had another roller-coaster ride, rising to $1,370 (July) and back again to $1,120 in December.

Just when it seemed to be back in a bull market ($1,260 just at the end of February): BAM! It moved sharply down to $1,195 by 6 March.

Wow! What a ride.

You also know that mining of gold is at multi-year, if not multi-decade lows, yet demand remains constant.

You know that the four refiners of gold in Switzerland are working flat out and everything they sell goes East to India, China and Russia.

You know that Germany has been repatriating all its gold.

You even know that one ounce of gold, today, buys essentially, for a professional, the same as an ounce in ancient Rome for a, then, Senator – a suit / a toga; leather shoes and belt / sandals and belt.

In other words, it has been written over and over again that gold should rise into the thousands of US dollars per ounce.

Yet, as I write it stands at just over $1,240/oz.

And I hear you ask the same question that everyone asks: Why isn’t it much, much higher?

To answer that, firstly, we have to go back to basics.

Gold is deemed by many to be the only true currency. Indeed, it has retained its purchasing power over at least 5,000 years.

However, never before have central banks been so instrumental in determining asset prices in global markets, nor has there been such deflation.

I respect your privacy and will never pass on your email address to anyone else.

Let’s look at the latter first.

Commodities, including gold, are priced in US dollars. A rising dollar generally brings commodity prices down and vice versa.

The US dollar soared between 2011 and early 2015. Thus, we have had very low inflation or even deflation for years.

Since then, against the normal basket of currencies (euro, yen, sterling, etc.) it’s essentially flat. It’s been down and up but, after two years, it is where it was in March 2015.

So, with the dollar no longer rising this has, of itself, been helpful to the prices of commodities and gold. If the dollar was to fall, sustainably, this could have a major inflationary effect and boost gold prices.

When I look at dollar charts, now, and compare to other major currencies, I see weakness entering the market and I can see material moves higher in the euro, yen, sterling, etc., over several months.

This could be strongly positive to gold.

It has been clear for a long time that monetary policy has been aimed at boosting stock markets. Here is a long term (60 year) chart of stock prices (S&P 500 index) versus commodity prices (CRB Index):

Click image to enlargeFor (whatever) reason, over the last 40+ years, stock prices have, almost continually, outperformed commodity prices.

Indeed, since the crash of 2008/09 you would have made great profits investing in US stocks and selling short commodities.

The ratio is at all-time highs. Note, though, the percentage rate of annual change stands at around zero, down from a whopping 60% a couple of years ago.

It was also at the 60% level just before the beginning of the multi-year bull market in commodities and gold, at the turn of the century.

One has to wonder if the rate of change next goes negative i.e. commodities OUTPERFORM stocks…

It seems to me, with a falling dollar we could well see commodities and gold outperform stocks (i.e. the percentage rate of change in the above chart turns negative).

Another factor in gold prices is the real interest rate (the base rate minus CPI).

Click image to enlargeFor the last 10 years, at least, there has been a strong inverse correlation between the gold price (right hand axis) and real interest rates (left hand axis).

On Wednesday 15 March the Fed raised the rate (for the second time in three months). However, real rates remain as low as they have been for many years. This is bullish for gold.

Finally, we turn to technical analysis.

Simple trend lines show both resistance and support are close, between around $1,280, to the upside, and $1,150 to the downside:

Click image to enlargeBreak up or down out of the huge multi-year wedge and the market will, likely, be telling us what the future holds.  Note the RSI is on a rising trend, suggesting upwards momentum.

Also, latterly, from 2013 to early 2016, as prices fell the RSI did not become oversold (under 30). On top, in the late 2016 correction, the RSI had a clear higher low. These are also bullish for gold.

In October 2016, my clients increased their portfolio holdings in gold and gold mining shares to a) the largest ever and b) the largest part of portfolios.

So, I’ve been putting our money where my mouth is.

I must add the following note of caution.

There has to be at least a 40% probability that we have at least one more lurch down in deflation in the short to medium terms.

In that scenario, I might find that – even if gold and miners do well (possibly exceptionally well) for months – I have to divest of the holdings.

In such a deflationary scenario, there is a case for gold going back to below December 2015 levels, i.e. below $1,050/oz and perhaps even as low as $500.

For now, though, I and my clients are heavily long. Nothing is forever and we must adjust portfolios according to market conditions, NEVER what we believe should be!

Jonathan Davis is the presenter of The Booms and Busts Show. You can subscribe here.

The post Why is gold not much, much higher? appeared first on The Daily Reckoning - UK Edition.

It was great to get Income On Demand launched last night.

But I know quite a few people will have missed the online event. I had few emails from people saying they were travelling, or otherwise engaged.

So here’s the deal. You can still watch the recording BUT you need to do so before tomorrow night.

After that we’re taking it down.

Before I share the link to go and watch it, make sure you’ve set aside a couple of hours.

I know that sounds like a lot, but we wanted to go through the strategy thoroughly.

There’s a lot of good info here, so make a brew (or if you’re an animal like me, eat your dinner in front of your laptop!)

Click here to find out how you can make a steady income – one you could potentially live on – from a lump sum of cash.

Yesterday was a busy old day – not just with the launch, but I also went to a gold event.

Our new office is only street away from Bloomberg, which was hosting the launch of Gold Focus 2017, an annual gold industry statfest and chin-stroke-athon from consultancy Metals Focus.

I sound dismissive – it’s actually a great way to keep in touch with the gold market, at both a high level and digging down into the weeds.

So, for example, I can now tell you what happened with gold mining supply last year (it went up, but at a much slower rate than previously), or how Malaysian gold jewellery exports fared (they fell).

I’m going to share a couple of charts I found especially interesting from the presentation.

The first shows Swiss gold bullion trade flows. A lot of refinery action happens in Switzerland, making it a kind of transit point for physical gold moving from one part of the world to another.

The reason is that different forms of gold demand need different forms of gold to supply it.

So a western ETF, say, will have a load of 400 ounce bars in a warehouse, while a Chinese retail buyer is likely to want a kilo bar of “four nines” purity (i.e. 99.99% pure).

Back in 2013, there was a lot of talk about how Swiss refiners were struggling to keep up with demand from East Asia.

I remember it well – I was working in the gold industry at the time.

What happened was this: the gold price dropped sharply, and Asian buyers were grabbing the bargain as Westerners sold.

The metal had to be refined into the appropriate form, and it clogged up the Swiss refineries for a time.

The interesting thing is that to some extent this has gone into reverse.

Certainly you saw a fair amount of dishoarding from Asian holders, with the metal making its way back westwards to Switzerland:

Source: Swiss Customs Administration via Metals Focus

The 2013 story had a clear narrative: gold going from “the West” to Switzerland, and from there onwards to “the East”.

Last year, though, was more mixed, and a bit quieter. A fair bit coming from Asia, but a greater amount heading towards Asia.

Export flows from North America and Europe netted off to around nought.

I mention this not because it’s particularly exciting, but precisely because it isn’t.

Last year wasn’t a story of frantic demand from Asia. Indeed, the Metals Focus take is that physical demand’s not looking too supportive of gold prices right now.

That’s a fair one. The traditional big demand sources (China and India) haven’t posted marquee demand numbers for a while now.

Fears of slowdown in China and various anti-corruption measures in India have served to constrain demand.

The more positive aspect of all this is that neither was 2016 a year of Western investors dumping gold.

Quite the reverse, actually – after a three-year bear market investors seemed to rediscover at least a little bit of their appetite for gold.

Hold that thought while I share the second slide I want to share:

Source: Metals Focus

Looking ahead to the rest of the year, Metals Focus expects the gold market to be in surplus.

What does this actually mean?

Well, your first thought might be “Crumbs, a surplus, that’s bearish for prices, right?”

But then, of course, the chart above shows a big deficit in 2013, a year in which gold prices fell.

And a surplus last year, when gold ended up on the year as a whole.
I’ll explain.

The surplus/deficit figure comes from Metals Focus adding up all the supply from sources like the gold miners, recycling and central bank selling (which is actually a demand source since they’re currently net buyers).

They then add up all the demand from jewellery makers, industry, people buying physical coins and bars and, yes, central banks, and subtract that from the supply figure.

The difference is the surplus.

The market, though, has to balance. You can’t sell gold that no one’s buying, and you can’t buy it if there’s none being sold to you.

The balance comes from investors, mainly Western investors, taking long positions in (predominantly) gold futures and gold ETFs.

So the surplus figure gives an indication of how much gold investors have to absorb to support the price.

As you can see from the chart, they absorbed a bigger surplus last year than Metals Focus thinks they’ll need to this year.

But, of course, those investors already in gold may feel they already have their allocation.

I respect your privacy and will never pass on your email address to anyone else.

Gold’s recent spike has been fuelled in part by geopolitical concerns surrounding the Syria missile attack by the US and rising tensions in North Korea.

Neither of these situations will be resolved soon, and both have the ability to escalate into war for the United States.

Geopolitics will continue to keep a floor under gold prices.

That said, what’s most impressive about gold’s multi-month rally is that the macro environment has not been particularly good. The Federal Reserve raised rates on March 15, and has been preparing markets for another rate hike on June 14.

The path toward higher rates is set in stone. The only debate is whether there will be two or three more rate hikes this year, but no one expects a pause of any length.

Fed tightening has supported a strong dollar, which is typically a headwind for the dollar price of gold. If you think of gold and the dollar as two forms of money, which I do, then it’s unusual for both to be getting stronger at the same time.

But that’s exactly what’s been happening.

After all, gold has no yield and competes with interest-bearing investments that do.

And therein lies a mystery. Increases in the fed funds rate, controlled by the Federal Reserve, are supposed to be negative for the dollar price of gold. After all, gold has no yield and competes with interest-bearing investments that do.

When interest rates go up, that yield comparison looks worse for gold and is supposed to result in lower gold prices.

Instead, gold has been rising along with interest rates. What gives?

In fact, the conventional wisdom about higher rates being bad for gold is incorrect. The correlation between the dollar price of gold and the fed funds rate is quite low. Those expecting gold prices to fall on higher rates are missing one very important element.

Those analysts are focused on nominal interest rates.

That’s the wrong benchmark. The key is to focus on real interest rates, which are computed by subtracting inflation from the nominal rate.

Inflation has been rising lately. When that inflation is subtracted from nominal interest rates, it turns out that real rates are going down, not up.

It’s those lower real interest rates that are providing a boost to gold prices.

With gold rising in a difficult environment, imagine how much more it will surge if the Fed moves to an easing policy.

And that’s exactly what I expect.

One more Fed rate hike in June might be the last nail in the coffin for the US economic expansion that began in June 2009.

The US economy is already weak. The Atlanta Fed estimates that first quarter GDP will be only 0.6% (the official figure will be announced by the Commerce Department on April 28).

This expansion is already one of the longest on record, over 91 months long. The average expansion since 1980, a period of long expansions, is 80 months. Clearly the economy is living on borrowed time as well as borrowed money.

The important thing to realise is that the Fed’s raising rates for the wrong reasons. It’s not raising rates because the economy is stronger. It’s raising rate in the face of weakness and it’s going to make that weakness worse.

In the short run we can expect higher rates and a slightly stronger dollar. But when the economy hits stall speed, which I expect around July, we might also see a big stock market correction. That’s highly likely because the stock market’s priced to perfection based on expectations about Trump’s policies, many of which are hitting the wall.

We’re not going to get the tax reform the markets want, or at least not anytime soon. Nor can we expect the type of infrastructure spending the market’s priced in for the foreseeable future.

Trump’s making more headway on regulatory reform, but that takes a long time to have an effect.

I haven’t even mentioned the health care fiasco. It’s not clear how that’s going to be resolved, if at all.

And beyond the distractions Trump has to contend with over Syria, China and North Korea, the issue of the Russian hacking is still out there.

We could see hearings to get to the bottom of it all, which chews into the calendar.

So it doesn’t look like we’ll be seeing a lot of progress on the economic front anytime soon. And there are signs that growth is already stalling.

When the Fed eases after June to resuscitate the economy, gold should soar on the news.

Then we have to consider the global factors that are driving the gold price.

Rising geopolitical tensions are an obvious factor, as mentioned. And nations like Russia and China have been buying lots of gold.

But that’s not all. The dollar’s been strong, based on the global dollar shortage combined with the Fed’s tightening. In China, citizens and companies are desperate for dollars to get their money out of the country before the China credit bubble explodes.

Other emerging markets countries are also scrounging for dollars to pay off their dollar-denominated corporate debt before the dollar gets even stronger and US rates go up.

Normally dollar strength means a lower dollar price for gold. But, gold is responding to its own dynamic based on supply and demand. The same Chinese who are desperate for dollars are also desperate for gold.

They need a store of wealth other than stocks, real estate, and bank deposits to weather the financial storm they know is coming.

Those who are stuck in China and can’t get their money out can at least buy physical gold and move to the sidelines before the credit storm strikes. Mining output is flat lining just as refinery demand is spiking so that puts upward pressure on the gold price as well.

But there’s another powerful factor boosting gold prices. That’s the shortage of physical supply relative to demand in the wholesale market.

Later this week, I’m having dinner with one of the most plugged-in gold industry insiders there is. This gentleman has his finger on the pulse of supply and demand in the physical gold market. And he’s been a source of excellent insights in the past.

I’ll be writing about our dinner soon, and I expect to have some valuable new information to share.

For now, gold continues to rise based on a combination of higher inflation, geopolitical concerns and tightness in supply.

We see no change in this landscape in the near term.

The message here is that, while gold is up, it’s not too late to jump on the bandwagon. This rally has legs.

Gold miners should do even better than physical gold because of the internal leverage in mining stocks. They can rise much faster than the physical gold price, often dramatically so.

It’s a good time to look at adding gold mining shares to your portfolio. Click here to see how much you can make if you invest in the right gold miners.

The post Why gold’s rally has legs appeared first on The Daily Reckoning - UK Edition.

I went on Tip TV last week to talk about gold. Specifically how investors can beat the gold rally by investing in gold miners.

Amid all the uncertainty in the global markets, we’ve seen gold shoot higher recently. Over the Easter weekend it even hit a five-month high.

In this interview I explain the factors that could be responsible for a major gold rally and why you should consider in miners to reap the benefits. In fact, a rise in gold prices could see the profitability of a gold miner rise by almost four times as much.

You can watch my interview with Tip TV in full here:

The post Simon Popple Says ‘Go For Miners’ On Tip TV appeared first on The Daily Reckoning - UK Edition.

One of the most interesting aspects of the financial markets is the interaction between different asset classes and the intricate web of connections that can build up between them.

Some of these relationships are pretty obvious, for example that between the FTSE 100 Index and Sterling exchange rates.

The FTSE 100 constituent companies earn 70% plus of their revenues from overseas, or in other words they are largely exporters.

The weaker pound we’ve experienced over the last 11 months, since the EU referendum, has made the goods and services provided by these exporters cheaper to foreign buyers – many of whose currencies will have appreciated against Sterling in this period.

The FTSE 100 has risen by an impressive 1290 points since May 2016, with the majority of those gains coming after the referendum result.

The US dollar, for its part, has often been an influence on commodity prices.

Historically, a stronger dollar was seen as being negative for commodity prices and commodity producers, simply because these basic raw materials are themselves priced in US dollars.

A stronger dollar made commodity prices dearer to foreign currency buyers.

Whilst this basic relationship remains in place and always will (whilst commodities are priced in dollars, anyway), it’s less influential than it was even a few years ago.

It’s not just currencies that can affect prices in different asset classes of course… individual commodities can do something similar.

Here’s how copper can influence the markets…

Take, for example, Copper – one of the most widely used and traded industrial metals. As we noted recently, copper can act as barometer of demand and global growth.

That’s because it’s intrinsically linked to many manufacturing processes, for example in construction, for plumbing and wiring, and in electrical equipment, such as motors and heat exchangers.

Copper prices and expectations about levels of copper demand can, and do, influence stock markets.

Our own FTSE 100 index is a case in point…

The mining sector currently accounts for around 6% of the UK’s blue chip index, but has been a much bigger component in the recent past.

The chart below shows us the Copper price in blue, plotted against the FTSE 100 index drawn in green.

Click image to enlarge.

As you can see, the two are closely correlated from 2003, all the way the way through to mid-2015, at which point they start to decouple.

The reason for that decoupling can be seen clearly in this chart below, which plots copper against the FTSE 350 mining sector index.

Click image to enlarge.

Quite simply, the value of the UK mining sector (this time drawn in blue) declines rapidly from mid-2014, following the copper price (in green) lower as it does so.

That contraction reduced the influence of the mining sector within the FTSE, and therefore copper’s influence over the UK equity index was similarly diminished.

To the right hand side of the chart you can see the rebound in both copper and the mining sector, as global economic recovery hopes built up in 2016.

But as we have noted elsewhere, this so-called “reflation trade” has lost much of its momentum in 2017.

Is gold the player it once was?

Gold has often been seen as a hedge against inflation and a store of value away from paper currencies, whose worth can be undermined by negative returns, which occur when interest rates paid on cash deposit are below the rate of inflation.

This is something we’ve started to experience here in the UK, as the 12% fall in the value of sterling has helped push up UK inflation to around 2.3%, whilst base rates are at a lowly +0.25%.

Savers can find better interest rates for their cash but not always for large sums, and this could become a serious issue going forward for those that are looking for income.

One of the main arguments against holding gold has been that it doesn’t produce an income, though that barrier has been knocked down in an era of negative interest rates.

Given the above, we could be forgiven for thinking that gold would be a reverse indicator for the financial system.

If it were, then the price of gold would move in the opposite direction to the price of, say, UK banking shares.

But rather intriguingly, and perhaps counter intuitively, this has not been the case for much of the past seven years, as the chart below shows:

Click image to enlarge.

Over the shorter term, the positive correlation between the two items is being tested, with gold up +6.0% year-to- date and the UK banks up a more pedestrian +2.8%.

Gold has lost ground over the last week however, as the banks have gained – so perhaps we will meet in the middle, as it were, in the near future.

Some of gold’s thunder as a portable store of value has been stolen by so-called “crypto currencies”, such as Bitcoin.

Though these are not yet established in the mainstream and, given their history and design, perhaps they never will be; they are likely to exert a growing influence over those looking for alternative investments.

To some extent gold has also been overshadowed in terms of its relationship with inflation.

Firstly because, for much of the last seven years there has been little or no inflation in major developed western economies, despite an orgy of money printing.

And secondly, as the markets consider the possibility of a return to normal monetary policy, investors are looking at Oil prices for clues and cues about future inflation levels, rather than to gold.

I think that’s largely because gold has few significant industrial uses outside of jewellery manufacturing.

Investors today are looking for the green shoots of economic recovery and demand-led inflation, which gold’s price does not provide.

None of these relationships are cast in stone of course, and they will vary alongside investor sentiment, but as they are all part of the investment lexicon we should be aware of them in action.

The post The influence of commodities on stock markets appeared first on The Daily Reckoning - UK Edition.

On Friday I passed along a couple of emails from a frustrated Tom Tragett.

Tom’s an old-hand currency trader. He’s been around the markets for a long time. And he’s never seen anything like bitcoin.

It’s safe to say he’s not a fan. Bitcoin drives experienced markets people like Tom mad, because it doesn’t fit in with all his trading experience. It literally does not compute.

Tom went on a bit of a rant about bitcoin: about its crazy margin requirements… its unquantifiable nature… its immunity to technical or fundamental analysis… its volatility.

The thing about Tom though, is that he’s been smart enough to spot the “backdoor” way to play bitcoin. A trading opportunity with huge upside and far less risk. He’s good like that.

Click here to learn Tom’s “better than bitcoin” trading opportunity.

I asked you to email me with about it, half expecting you’d agree with Tom. But I had you wrong. Here’s Andy C:

Tom’s frustration oozes off the page.  Exactly the sort of thing that helps to convince me this is a game changer.

Cryptos are digital gold. Two possible flaws are:

 1) Serious assault by governments and bankers.

I’m not sure they can succeed, except by making cryptos unacceptable to Joe Public via the propaganda war that makes the association between Bitcoin and organised (and unorganised) crime. 

That won’t actually kill it them, it will just leave them to thrive as an underground currency. I wouldn’t be at all surprised if the recent ransomware hacks were part of the campaign.  Why else pick on the NHS?  What sort of pirate attacks a hospital ship when there are Spanish galleons a-plenty for the taking?

2) The next financial crash might have a serious disruptive effect on the internet without which cryptos can’t function.  

There’s no telling the scale of the disruption we’re in for.  If I was in the seriously wealthy class I’d be thinking in terms of the classic 10% physical gold and silver and 10% cryptos.  Belt and braces: one or other or both will come up trumps after the apocalypse and if the crisis is not earth shattering one or other or both will do just fine anyway.

Tom’s funny.  He’s been trading bits of paper for years and he thinks digital currency is hard to put a value on?  Go figure! as the cousins would say.

Andy C is right that governments can’t stop these “underground currencies”. And that’s a pretty good argument for cryptos on its own.

But the 105 billion dollar question is, what use is there for cryptos apartfrom hiding stuff from the government?

Here’s another one from Darren B, who I reckon is more typical of most crypto investors. Why’s he buying? FOMO!

Where to start?

I’m a middle-aged family man, safely investing in ISAs and trying to find the goodness globally.

Safety in funds of funds, a bit of random gold in a lockup and a spread of motley fool inspired stocks.

Along comes bitcoin and shakes me up a bit.

I missed the internet revolution, when I was at the right age to see it but looking the wrong way (girls, drinking, property).

So my reason for interest in bitcoin is I don’t want to miss again.

So I look into it and see a few words and articles which make me think there is something in it:

Block chain

Financial processes

Contracts

Words I don’t really understand but have brands and banks tagged to them like there is a science lab cooking up goodies I don’t want to miss out on.

And each cryptocurrency has an exotic story, one is good for smuggling Chinese money, one being tested by Facebook as their currency of choice, one about to become the financial backbone of future trading and business deals.

So I’ve bought some. £5000 of stuff, bitcoin, ether, ripple, gnome (?!), ethereum classic (what?), litecoin (why?) and more (I honestly forget what I have, doesn’t seem important!).

And watched them jump up and down and up and down.

I’m hoping one becomes the big fish, one explodes into life with me riding on it.

Not bitcoin, I barely own a whole one.

But the others, I have some purely in case I miss the boat.

As it stands, they are worth £6345.

Last week they were worth £4788.

I’ve written it off already as a complete punt. While I cross my fingers and hope someone clever is going to do something really valuable with them. There’s no more to it. But reading the forums you’d think every single crypto is on the verge of world-changing “things”.

Between Tom, Andy and Darren we’ve got three big ideas about cryptocurrencies.

Tom says they’re unworkable…

Andy says they’re digital gold…

And Darren hopes they’ll make him rich.

There’s a lot more to say on this topic. Have your say at sean@agora.co.uk.

The post Readers respond to (and laugh at) Tom Tragett appeared first on The Daily Reckoning - UK Edition.

If you think you’ve missed out on the best of bitcoin…

One Wall Street analyst says: think again.

Thomas Lee of FundStrat has released a note in which he explains why bitcoin could be heading as high as $55,000.

His argument is very simple: cryptos like bitcoin are starting to take over from gold.

The basic idea is that people use gold as an alternative money. A way to store their wealth outside the official money system.

Lee says bitcoin and other cryptos area starting to do the same job.

But – and here’s where it gets interesting – the amount of money parked in cryptos is a drop in the ocean, compared to the amount of money in gold.

At the moment bitcoin is just 0.7% the “alternative money” market.

If that number grows to just 5% of that market… and there are good reasons to think it will…

Bitcoin could go anywhere from $12,000 to $55,000.

And that’s before we even get to the many “penny crypto” currencies, with a lot more runway in front of them.

Cryptos are “popping” in value every day now. And we think ordinary people should get in on this.

That’s why our experts have prepared a presentation that will show you everything you need to know to profit from this incredible opportunity…

Click here for the full details now.

The post How To Get In On “Bitcoin To $55,000” appeared first on The Daily Reckoning - UK Edition.

Being elbows deep in all things crypto…

I had a look over the weekend at what people were saying about bitcoin on social fabric destroyer Twitter.

“Bitcoin still shaking out the weak hands” said one comment (if you recall bitcoin got hammered last week; it’s staging a tentative recovery so far this week).

“Bring the pain. Let’s test the weak hands and the weak mines to the limit,”said another.

Ah, the “weak hands” meme. I remember it fondly from my days working in gold.

Any rally was a vindication of the True Believers.

Any sell-off an even bigger vindication of their True Beliefs, their Strong Hands, their fortitude in the face of shadowy manipulators.

Personally I’m wary of mixing such quasi-religious fervour with the decisions I make about money.

You can hold an allocation to gold as a hedge against systemic crisis. I think that’s a good idea myself.

Similarly, you can take a position in cryptocurrencies because there’s an outside chance it could net you a life-changing fortune.

But neither investment requires you to sign up body, soul and mind to a set of beliefs that define your core identity.

Remember that.

Another parallel I’ve noticed between crypto and gold is a wariness of government that’s immediately abandoned whenever a government does something seen as positive for gold.

Back in the day, talk of China launching a gold-backed currency was all the rage.

This month, Jim Rickards draws our attention to the People’s Bank of China’s efforts to create its own digital currency.

“Bitcoin fans go on and on about how digital crypto-currencies are a form of liberation from state power and government control,” says Jim.

He goes on:

“The libertarians and anarcho-capitalists join the chorus (in addition to the drug dealers, tax evaders, and terrorists who already inhabit the dark web).

“There’s only one problem with this viewpoint. It completely ignores the reality of state power.

“You don’t actually believe governments will allow an attack on their money monopoly without pushback do you?

“Cryptocurrencies may have encryption, but states have guns, jails, detention centres, firing squads, confiscatory power and, in some cases, torture chambers.

“Who do you think wins that fight when push comes to shove?

“Governments are also good at lying in wait, letting the crypto fan boys and girls get full of themselves, and then pouncing like a hidden tiger or snake in the grass.

“As evidence of this, the attached article shows how China is testing its own digital currency.

“The IMF also announced this past week that they are encouraging other governments to do the same.

“The bitcoin fans take this as “proof” of the success of their new paradigm.

“It actually proves the opposite.

“Once these new state-controlled digital currencies are ready, captive citizens will be ordered to use them (so the state controls and sees everything).

“Then the competing cryptocurrencies will be crushed (unless exchanges offer to cooperate by giving up user information).”

So some of the more high-minded arguments for cryptocurrencies may well have fatal flaws.

Is that a reason to avoid them entirely?

Not necessarily.

“I find that gold and Bitcoin are actually somewhat complementary – that one’s strengths are the other’s weaknesses, and vice versa,” writes Nathan Lewis, author of Gold: The Once and Future Money, writes in this Forbes post.

Lewis sees a future in which people seek to escape an unreliable currency by using gold as a long-term savings account and having a small amount of cryptocurrency AS a kind of current account for day-to-day purchases.

He continues:

“This model is actually not much different from similar arrangements we have seen worldwide. People in Turkey, like many such places with a history of unreliable currencies, might use euro-denominated assets as a store of value, and also have prices denominated in euros. However, actual transactions can be made in Turkish lira.

“A thousand years ago – also in the present-day location of Turkey – the Byzantine Empire had a system that was based on a highly-reliable gold coin, the solidus, which did not change in value for over seven centuries. However, especially during the fourth century, most commerce was conducted with a variety of junky copper coins, whose market value against the solidus was quoted daily.”

Of course, in this schematic it’s gold that is the long run store of value. Bitcoin is just the “junky copper coins” (so who knows what that would make the hundreds of smaller “alt-coins” riding on bitcoin’s undercarriage).

I’ll confess I rather enjoy this kind of “What is money?” style discussion.

In fact, I plan to dust off a short essay I wrote a couple of years back for tomorrow’s DR, and re-examine it through the prism of cryptocurrencies.

Again, though, I’d be wary of letting such ideas drive your investing decisions.

For most of us, our interest in crypto is straightforward.

Can I make money from it?

To which my answer is, you probably won’t, but if you do you could make a serious return on a relatively small investment.

To see how much you could make, read this from our very own cryptocurrency expert

The post Gold vs bitcoin appeared first on The Daily Reckoning - UK Edition.

Last week featured two unusual stories on gold — one strange and the other truly weird.

These stories explain why gold is not just money but is the most politicized form of money.

They show that while politicians publicly disparage gold, they quietly pay close attention to it.

The first strange gold story involves Germany…

The Deutsche Bundesbank, the central bank of Germany, announced that it had completed the repatriation of gold to Frankfurt from foreign vaults.

The German story is the completion of a process that began in 2013. That’s when the Deutsche Bundesbank first requested a return of some of the German gold from vaults in Paris, in London and at the Federal Reserve Bank of New York.

Those gold transfers have now been completed.

This is a topic I first raised in the introduction to Currency Wars in 2011. I suggested that in extremis, the US might freeze or confiscate foreign gold stored on US soil using powers under the International Emergency Economic Powers Act, the Trading With the Enemy Act or the USA Patriot Act.

This then became a political issue in Europe with agitation for repatriation in the Netherlands, Germany and Austria.

Europeans wanted to get gold out of the US and safely back to their own national vaults. The German transfer was completed ahead of schedule; the original completion date was 2020.

But the German central bank does not actually want the gold back because there is no well-developed gold-leasing market in Frankfurt and no experience leasing gold under German law.

German gold in New York or London was available for leasing under New York or UK law as part of global price-manipulation schemes. Moving gold to Frankfurt reduces the floating supply available for leasing, making it more difficult to keep the manipulation going.

Why did Germany do it?

The driving force both in 2013 (date of announcement) and 2017 (date of completion) is that both years are election years in Germany.

Angela Merkel’s position as chancellor of Germany is up for a vote on Sept. 24, 2017. She may need a coalition to stay in power, and there’s a small nationalist party in Germany that agitates for gold repatriation.

Merkel stage-managed this gold repatriation with the Deutsche Bundesbank both in 2013 and this week to appease that small nationalist party and keep them in the coalition. That’s why the repatriation was completed three years early. She needs the votes now.

The truly weird gold story comes from the United States…

Secretary of the Treasury Steve Mnuchin and Senate Majority Leader Mitch McConnell just paid a visit to Fort Knox to see the US gold supply. Mnuchin is only the third Treasury secretary in history ever to visit Fort Knox and this was the first official visit from Washington, DC, since 1974.

The US government likes to ignore gold and not draw attention to it. Official visits to Fort Knox give gold some monetary credence that central banks would prefer it does not have.

Why an impromptu visit by Mnuchin and McConnell? Why now?

The answer may lie in the fact that the Treasury is running out of cash and could be broke by Sept. 29 if Congress does not increase the debt ceiling by then.

But the Treasury could get $355 billion in cash from thin air without increasing the debt simply by revaluing U.S. gold to a market price. (US gold is currently officially valued at $42.22 per ounce on the Treasury’s books versus a market price of $1,285 per ounce.)

Once the Treasury revalues the gold, the Treasury can issue new “gold certificates” to the Fed and demand newly printed money in the Treasury’s account under the Gold Reserve Act of 1934.

Since this money comes from gold revaluation, it does not increase the national debt and no debt ceiling legislation is required.

This would be a way around the debt ceiling if Congress cannot increase it in a timely way. This weird gold trick was actually done by the Eisenhower administration in 1953.

Maybe Mnuchin and McConnell just wanted to make sure the gold was there before they revalue it and issue new certificates.

Whatever the reason, this much official attention to gold is just one more psychological lift to the price along with Fed ease, scarce supply and continued voracious buying by Russia and China.

The post Weird things are happening in gold appeared first on The Daily Reckoning - UK Edition.

Let me tell you a quick story…

Once upon a time, an old man sells all of his goods for a large lump of gold, which he then proceeds to bury in a hole just outside his property.

He visits the spot every day, uncovering the gold, looking at it for a bit then covering it back up.

One of the man’s employees notices this odd behaviour and follows the old man. He sees the buried gold and when the old man returns home, the employee removes the gold and runs away with it.

The next day the old man finds his gold is missing and cries out in agony.

A neighbour hears the old man’s story and suggests that he place a rock in the hole and cover it back up.

“It makes no difference, does it?” the neighbour says. “You didn’t do anything with the gold anyway.”

One of our main aims in trading is capital preservation – as not losing money will eventually lead you to making money.

Limiting potential losses to small amounts of your account allows your winners to be bigger than your losers and hopefully, with a good win ratio, leads to profitability.

However, I don’t believe that enough emphasis is put on where to exit your trade.

Many traders concern themselves with where to enter a trade but neglect to think about their exit.

But I actually believe that where to exit your trade should be at the forefront of your mind when placing your trade alongside entries and stop placements.

After all, your exit determines whether you have made or lost money, so ignore it at your peril.

I admit; I used to be a victim of being far too ambitious about my price targets.

I used to want to go for trades that had reward ratios of four upwards.

But the problem with this is that yes, it’s great when they come off, but in reality trades with that large a risk: reward ratio either:

a) Tend to have too tight a stop and so it’s easy to get stopped out…

b) The take profit level is outside of the market structure. The price hits a level and reverses, leading you close the trade for a smaller reward (which messes up your expectancy on the sample).

c) Reverses and hits your stop completely, leading to a loss. This is less preferential, but actually teaches a better lesson, since you adhered to your risk management throughout the trade.

Your psychological approach to trading the markets should always be to minimise risk, whilst maximising reward.

To do this you should combine risk management with market structure.

Here is an example on Tesla (TSLA):

Click image to enlarge.

What you want to do is consider support and resistance levels as magnets.

One magnet repels (your retested level where you execute your order) and the other one attracts (where your take profit should be).

However, you want your take profit always to be within the market structure, and your stop loss to be outside of the market structure – as you can see from the image above (the green and red shaded areas on the chart).

Why?

Because you don’t want the market to miss your take profit level, but you want to let the market breathe with your stop loss level…

Otherwise you could get taken out easily on a trade that could have worked.

Remember: The support/resistance market structure acts as magnets until it doesn’t… in which case a new structure is formed based on new market beliefs and new levels of interest.

This is why I consider support and resistance to be the foundations of any trading strategy.

In fact, trading purely support and resistance can become a strategy in itself, provided you are able to understand other market factors surrounding it.

As ever, if you have any questions on this please hit reply and let me know.

The post Ignore this at your peril… appeared first on The Daily Reckoning - UK Edition.

In every wolf pack, you have an alpha.

The alpha is the leader, the one who guides and keeps control of the rest of the pack

The rest of the pack is actually just the wolf’s offspring and sometimes the weak offspring die…

Let’s consider this for a second… why would the weak offspring die?

My bet is that they stop following the strong leader and get caught out in a cold winter, or get hunted down by another pack…

The markets operate in pretty much the same way…

We are the offspring in this game and the big banks, hedge funds, and people with multi million pound accounts are the alpha wolves.

They are the hunters who are able to push the market around… start new trends… take us out and have more liquidity for their larger orders.

So what can we do to identify which way the larger players want to send the market?

Well… there’s a little thing known as the Commitment of Trader’s Report (COT) that is released by the Commodity Futures Trading Commission (CFTC) – a US regulator – every Tuesday.

The Commitment of Trader’s Report displays the changing positions of market participants on US futures exchanges. You can view the latest report here.

However, deciphering that report can be an absolute headache. It’s used more as just a data source than anything to take information from.

I much prefer looking at the report as a chart – see the chart below for the Euro FX (Euro futures):

Click image to enlarge. Source: barchart.com

Let me explain this chart to you…

The line we want to focus on is the green one in the bottom section of the chart.

This shows the positioning of the large speculators. These are the guys that drive the trends that we see in the markets.

Note that they work in opposite to the red line…

The red line shows us commercial speculators. These are the firms that are hedging their business activities. This might be Apple, Amazon, Tesla or Tesco, for example.

When the market is rising, they may seek to hedge any Euro denominated currency risk and so they sell futures when the market is rising, and buy futures when the market is falling.

Therefore, the large speculators (green line) buy when these guys are selling, and sell when these guys are buying.

Take a look back at the chart and note the horizontal and vertical black lines I’ve drawn on…

When the green line started rising (and the speculators started closing their short positions), the price started to rise.

When we reached 1.14, the speculators flipped their bias to net long Euro. That is when we had the breakout above 1.14 and the rally up to 1.20.

You can clearly see that looking at COT data is a very handy way to see where the market wants to go…

Here’s another example for you – have a look at the following charts showing Gold and the AUD.

Click image to enlarge. Source: barchart.com

Click image to enlarge. Source: barchart.com

Now, before I explain what you can see in those charts, let me firstly tell you about the correlation between Gold and the Aussie Dollar…

Australia produces a hell of an amount of gold. This means that there is a flow of money between mining firms and the firms that buy gold to produce goods to sell to consumers.

Therefore, it is only right that the Australian dollar would follow gold demand.

Now, take a look at the green line on both charts again (positioning of the large speculators). Note that both increased in long positioning at the same time.

(For the Gold chart, the red line is producers – they will always be selling to demand which is why producers cannot turn net long and speculators cannot turn net short).

Remember, COT positioning helps for longer-term position traders.

But it can also help us with deciding when a trend is going to change as well…

Take a look back at the Gold chart above. Note the extreme positioning of the red and green lines. They are currently at the same extreme levels of the past three years.

Now a look at the price action, which is slightly easier to view in the chart below:

Click image to enlarge. Source: tradingview.com

This is very bearish. There is a wick to the upside, but a bearish candle that shows absolutely no buyers on the weekly open (there is no wick up on the red candle).

If we combine that with our extreme net positioning on Gold, we can see that there is a case to be made to remain short to the next support level at $1293.

Using the trend clues made by the bigger players can really help boost your trading…

And remember: never try to fight them, since they will make you the beta of the pack.

The post Why it pays to follow the leader… appeared first on The Daily Reckoning - UK Edition.

I write and speak a lot on gold. In contrast — and this surprises some people — bitcoin is my least favourite topic. I’m made my views known many times.

Still, interviewers love to get into the “gold versus bitcoin” debate. I continually get dragged into discussing bitcoin in interviews on TV, radio and the internet. So I discuss it whether I want to or not.

From my perspective, you might as well discuss gold versus watermelons or bicycles versus bitcoin. In other words, it’s a phony debate. I agree that gold and bitcoin are both forms of money, but they go their own ways.

There’s no natural relationship between the two (what traders call a “basis”).

The gold/bitcoin basis trade does not exist. But people love to discuss it, and I guess Goldman Sachs is no different.

Goldman Sachs has released a new research report that comes down squarely on the side of gold as a reliable store of wealth rather than bitcoin, which is untested in market turndowns.
Precious metals like gold are “neither a historic accident or a relic,” said the report.

It affirmed that gold is more durable than cryptocurrencies because cryptocurrencies are vulnerable to hacking, government regulation and infrastructure failure during a crisis.

Goldman also reminds us that gold holds its purchasing better than cryptocurrencies and has much less volatility. In dollar terms, bitcoin has had seven times the volatility of gold this year.

Since Goldman’s research department has not been notable as a friend to gold, the fact that they favour gold over bitcoin is highly revealing in more ways than one.

I don’t deny that bitcoin has made some people multimillionaires, but I also believe it’s a massive bubble right now.

I don’t own any bitcoin and I don’t recommend it. My reasons have to do with bubble dynamics, potential for fraud and the prospect of government intrusion.

So bitcoin evangelists seem to think I’m a technophobe. But I’ve read many bitcoin and blockchain technical papers. I “get it” when it comes to the technology.I even worked with a team of experts and military commanders at U.S. Special Operations Command (USSOCOM) to find ways to interdict and disrupt ISIS’ use of cryptocurrencies to fund their terrorist activities.

I will say, however, that I believe in the power of the technology platforms on which the cryptocurrencies are based. These are usually called the “blockchain,” but a more descriptive term now in wide use is “distributed ledger technology,” or DLT.

So although I am a bitcoin sceptic, I believe there is a great future for the blockchain technology behind them.

I’m not telling anyone not to own cryptocurrencies, but you need to do your homework before you do.

Editor’s note: Speaking of doing your homework…

With many small cryptocurrencies shooting up by thousands of per cent seemingly overnight, it’s tempting to take a punt on a particular digital currency without doing much research.

So, if you haven’t already, I would recommend taking a look at our crypto expert John Duncan’s ‘special crypto blueprint’ before buying any crypto to make sure you get off on the front foot.

You can read John’s special blueprint here

The post Gold vs. Bitcoin: Goldman Sachs weighs in appeared first on The Daily Reckoning - UK Edition.

I’ve been discussing recently how I’ve changed my mind on crypto currencies…

And how, from speaking to experts on cryptocurrencies they do not require innate value to have ‘value’.

Well I just want to go back to this idea of “innate value” again today – as I think it’s important…

Before 1972, the US used to back their currency up via gold (the gold standard).

They (the Fed) believed that if they had an innate store of value, it would be a lot easier to keep the value of the dollar consistent.

They thought that by simply keeping this price pegged, things would be successful.

The issue here is that you need the supply of money to be manipulated easily to be able to affect the interest rate (therefore preventing inflation or deflation).

When gold is your store of value, you have to increase or decrease your gold holdings according to the situation…

The inherent issue here is that gold takes time to mine!

This means that the value of the dollar cannot be affected correctly when required.

So pegging the dollar to gold was of no real benefit.

Now on the flip side, I don’t believe that the way ‘money’ has value now is of any real benefit…

In fact, I’d say most economic problems are down to the central banks creating money out of thin air (debt).

Whenever a treasury bond is made, that’s effectively money being made from the central bank…

Out of thin air.

And this money being made pushes down rates and we get the very rich being able to buy houses cheaply, reinvest in offshore schemes with cheap financing etc, etc.

However, it does give the Fed far more flexibility when it comes to being able to work through market downturns.

Well, in theory anyway…

The post The innate value of money… appeared first on The Daily Reckoning - UK Edition.

Gold could be in a long-term trend right now that spells dramatically higher prices in the years ahead.

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.

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.

Since December 2016, it appears that this bear market pattern has reversed. We now see “higher highs and higher lows” as part of an overall uptrend.

The Feb. 24, 2017, high of $1,256 per ounce was higher than the prior Jan. 23, 2017, high of $1,217 per ounce.

The May 10 low of $1,218 per ounce was higher than the prior March 14 low of $1,198 per ounce.

The Sept. 7 high of $1,353 was higher than the June 6 high of $1,296. And the Oct. 5 low of $1,271 was higher than the July 7 low of $1,212.

Of course, this new trend is less than a year old and is not deterministic. Still, it is an encouraging sign when considered alongside other bullish factors for gold.

Where does the gold market go from here?

We’re seeing a persistent excess of demand over new supply. China and Russia alone are buying more than 100% of annual output each year.

Private holders are keeping their gold as well. On a recent visit to Switzerland, I was informed that secure logistics operators could not build new vaults fast enough and were taking over nuclear-bomb-proof mountain bunkers from the Swiss Army to handle the demand for private storage.

With gold sellers disappearing and large demand continuing, the price will have to go up to clear markets.

Geopolitics is another powerful factor. The crisis in North Korea is not getting any better; it’s actually getting worse. Syria, Iran and the South China Sea are additional flashpoints. The headlines may fade in any given week, but geopolitical shocks will return when least expected and send gold soaring in a flight to safety.

Finally, the Fed will not raise rates in December, contrary to market expectations.

As market probabilities catch up with reality, the dollar will sink and gold will rally.

In short, all signs point to higher gold prices in the months ahead. I look for a powerful surge toward $1,400 by the end of this year based on Fed ease, geopolitical tensions and a weaker dollar.

The gold rally that began on Dec. 15, 2016, looks like one that will finally break the bear pattern of lower highs and lower lows and turn it into the bullish pattern of higher highs and higher lows.

The post Gold: higher highs and lower lows appeared first on The Daily Reckoning - UK Edition.

The physical fundamentals are stronger than ever for gold.

Russia and China continue to be huge buyers. China bans export of its 450 tons per year of physical production.

Gold refiners are working around the clock and cannot meet demand. Gold refiners are also having difficulty finding gold to refine as mining output, official bullion sales and scrap inflows all remain weak.

Private bullion continues to migrate from bank vaults at UBS and Credit Suisse into nonbank vaults at Brinks and Loomis, thus reducing the floating supply available for bank unallocated gold sales.

In other words, the physical supply situation has been tight as a drum.

The problem, of course, is unlimited selling in “paper” gold markets such as the Comex gold futures and similar instruments.

One of the flash crashes this year was precipitated by the instantaneous sale of gold futures contracts equal in underlying amount to 60 tons of physical gold. The largest bullion banks in the world could not source 60 tons of physical gold if they had months to do it.

There’s just not that much gold available. But in the paper gold market, there’s no limit on size, so anything goes.

There’s no sense complaining about this situation. It is what it is, and it won’t be broken up anytime soon. The main source of comfort is knowing that fundamentals always win in the long run even if there are temporary reversals. What you need to do is be patient, stay the course and buy strategically when the drawdowns emerge.

Where do we go from here?

There are many compelling reasons why gold should outperform over the coming months.

Deteriorating relations between the U.S. and Russia will only accelerate Russia’s efforts to diversify its reserves away from dollar assets (which can be frozen by the U.S. on a moment’s notice) to gold assets, which are immune to asset freezes and seizures.

The countdown to war with North Korea is underway, as I’ve explained repeatedly in some of these pages. A U.S. attack on the North Korean nuclear and missile weapons programs is likely by mid-2018.

Finally, we have to deal with our friends at the Fed. Good jobs numbers have given life to the view that the Fed will raise interest rates next month. The standard answer is that rate hikes make the dollar stronger and are a head wind for the dollar price of gold.

But I remain sceptical about a December hike. As I explained above, the market is looking in the wrong places for clues to Fed policy. Jobs reports are irrelevant; that was “mission accomplished” for the Fed years ago.

The key data are disinflation numbers. That’s what has the Fed concerned, and that’s why the Fed might pause again in December as it did last September.

We’ll have a better idea when PCE core inflation comes out Nov. 30.

Of course, the Fed’s main inflation metric has been moving in the wrong direction since January. The readings on the core PCE deflator year over year (the Fed’s preferred metric) were:

January 1.9%
February 1.9%
March 1.6%
April 1.6%
May 1.5%
June 1.5%
July 2017: 1.4%
August 2017: 1.3%
September 2017: 1.3%

Again, the October data will not be available until Nov. 30.

The Fed’s target rate for this metric is 2%. It will take a sustained increase over several months for the Fed to conclude that inflation is back on track to meet the Fed’s goal.

There’s obviously no chance of this happening before the Fed’s December meeting.

A weak dollar is the Fed’s only chance for more inflation. The way to get a weak dollar is to delay rate hikes indefinitely, and that’s what I believe the Fed will do.

And a weak dollar means a higher dollar price for gold.

Current levels look like the last stop before $1,300 per ounce. After that, a price surge is likely as buyers jump on the bandwagon, and then it’s up, up and away.

Why do I say that?

There’s an old saying that “a picture is worth a thousand words.” This chart is a good example of why that’s true:

Gold analyst Eddie Van Der Walt produced this 10-year chart for the dollar price of gold showing that gold prices have been converging into a narrow tunnel between two price trends — one trending higher and one lower — for the past six years.

This pattern has been especially pronounced since 2015. You can see gold has traded up and down in a range between $1,050 and $1,380 per ounce. The upper trend line and the lower trend line converge into a funnel.

Since gold will not remain in that funnel much longer (because it converges to a fixed price) gold will likely “break out” to the upside or downside, typically with a huge move that disrupts the pattern.

At the extreme, this could imply a gold price on its way to $1,800 or $800 per ounce. Which will it be?

The evidence overwhelmingly supports the thesis that gold will break out to the upside. Central banks are determined to get more inflation and will flip to easing policies if that’s what it takes.

Geopolitical risks are piling up from North Korea, to Saudi Arabia, to the South China Sea and beyond.

The failure of the Trump agenda has put the stock market on edge and a substantial market correction may be in the cards. Acute shortages of physical gold have also set the stage for a delivery failure or a short squeeze.

Any one of these developments is enough to send gold soaring in response to a panic or as part of a flight to quality. The only force that could take gold lower is deflation, and that is the one thing central banks will never allow. The above chart is one of the most powerful bullish indicators I’ve ever seen.

Get ready for an explosion to the ups ide in the dollar price of gold. Make sure you have your physical gold and gold mining shares before the breakout begins.

The post Golden Catalysts appeared first on The Daily Reckoning - UK Edition.

Gold continues to divide opinions.

The yellow metal’s supporters insist that every investor should have some, that it’s still the classic go-to safe haven in times of potential financial panic and that the gold price is poised to surge – probably in the very near future.

In contrast, gold’s detractors claim that it’s now an anachronism. They maintain that, apart from its uses in the likes of jewellery, it doesn’t serve any useful purpose or generate any income. Cryptocurrencies, they say, are better safe havens.

Not sure about that, but this article is about gold itself, not crypto. Today I review the metal’s recent history and examine what could trigger the next price rise and how large this move might be.

Simple story

Some people will try to tell you that the technical background to bullion’s price action is very complex. Yet the gold story is pretty simple. This chart sums it up…

Click to enlarge
Source: St Louis Fed, Daily Reckoning

It’s from America’s Federal Reserve Bank of St Louis, which calls itself Fred for short. (Fred, by the way, provides a vast amount of economic data and build-it-yourself charts and is well worth looking up).

Back to the graphic: the red line shows the gold price in American dollars over the last decade. As you can see, during the last decade it’s been inversely correlated – indeed, quite remarkably so, as I explain lower down – with the blue line.

That’s the yield on US 10-year Treasury Inflation-Indexed Securities (TIPS).

Technical time-out: TIPS are the broad equivalent of Britain’s index-linked gilts. The yield on a TIPS bond is equal to the annual income return of an equivalent duration US Treasury security – minus America’s inflation rate – and is otherwise known as the long-term real interest rate.

Partly right popular views

It’s a popular belief that increases in interest rates by themselves are bad for bullion. Inflation, meanwhile is supposed to improve its value.

But both views are only partially correct.

Sure, higher interest rates do make it more expensive to hold non-interest bearing assets such as gold, making the metal less attractive to investors.

Economists call this a ‘greater opportunity cost’. And inflation increases mean that money is worth less, so gold should become more valuable when measured in cash terms.

To repeat, though: the real driver of the gold price, as the above chart shows, is the US real interest rate – which is currently around 0.5%. And the real interest rate has two variables: nominal (i.e. actual) interest rates and inflation.

Gold only comes under pressure when nominal rates rise faster than increases in the consumer price index.

Further, before the great financial crisis that began a decade ago, the real interest rate was also viewed as being roughly equivalent to the real economic growth rate.

Now the US economy has been expanding someway faster than 0.5% in recent years. For example, 2017 Q3 annualised real growth was 3%.

Here’s where the Fed’s constant market meddling has had such an impact.

Quantitative easing policies, in other words America’s central bank buying bonds, have pushed up prices (and therefore driven down yields) on US Treasuries. You can see the effects on the chart, in particular between mid-2011 and end-2013.

That’s when TIPS yields dipped into clearly negative territory despite average US economic growth rates of around 2%. It was a great time to be a gold investor.

Since the real interest rate turned positive again in mid-2013, gold hasn’t had it as good.

While the real rate has moved sideways since then, bullion has done likewise.

Easy call?

Looking forward, then, all that gold investors need to do is guesstimate where the TIPS yield will go in the future. History shows that the gold price measured in US dollars is highly likely to head in precisely the opposite direction.

That’s easy to say, though of course, it’s rather more difficult to predict.
None of us has a crystal ball.

But we can make some reasonable assumptions.

Here’s a chart of US inflation (red line) and nominal 10-year Treasury yields over the last 30 years, again for which many thanks to Fred.

Click to enlarge
Source: St Louis Fed, Daily Reckoning

As you can see, while both have fallen a long way over that period, bond yields have fallen much more than inflation. So if both were to turn up, we might expect real rates to rise once more into line with current levels of economic expansion.

But how likely is this? While US core consumer prices could pick up in the near term, over the long run I reckon there’s more chance of the opposite happening.

The post-financial crisis economic recovery is now very long in the tooth. At this stage of the business cycle, recession appears more likely than inflation.

Both stock prices and lower-grade corporate credit – junk bonds, in other words – look vulnerable to significant falls.

We know what central banks are likely to do in those circumstances: Negative interest rates could soon be back on the agenda.

So the scene is being nicely set for the next bull market in bullion. Again, the chart shows us that 0.8% negative real yields powered gold to $1,800 per ounce.

In the next crisis, central banks could engineer even larger negative numbers. That could lead to a gold price well in excess of $2,000/ounce.

I believe that the only key question left is ‘when’, not ‘if’, negative real rates return to boost gold. That’s harder to answer. But if you don’t already hold gold, the only way to ensure that you won’t be caught out – when it does take off – is to buy some.

Fortunately, my colleague and gold expert Simon Popple will be revealing a major gold opportunity that he’s kept close to chest over the last few weeks…

Those details will be hitting your inbox very soon.

The post The real reason gold is going to go up appeared first on The Daily Reckoning - UK Edition.

Editor’s note: Over the last few days our editors have offered you their views on gold, and seeing as the yellow metal can always be relied upon to divide opinion, we’d like to hear if you’ve agreed with them.

Are you bullish about gold? Or do you think the days of major price hikes are long gone? Please send us your views, or any questions you might have at feedback@agora.co.uk and we’ll be happy to address them in one of our articles.

In the meantime, here’s currency expert Tom Tragett with his take…

Since peaking around $1,350 back in early September this year, gold has been under a degree of pressure with any rallies turning out to be fairly stunted affairs.

That has kept the price inside a $1,260-$1,310 range for the past 2 months and whilst it has been showing signs of bouncing lately, as priced in dollars the metal has been quite dull.  More recently however, with global equity markets shaking down somewhat in early November, the metal has looked a little more interesting.

However, from my perspective the interest is more from a long term view and certainly not one onto which I would venture a leveraged bet or one that I would price in the dollar necessarily either.

I think gold priced in sterling is far more interesting just now.

In fact, I have had enquiries from friends who have expressed an interest in buying gold coins. As all of them are UK based, I think its safe to say that from their perspective it would make such interest a XAU/GBP(sterling gold) trade even if by the physical coin route.

Frankly it makes no difference to me how they want to play it in terms of what kind of gold they want to buy, but it did make me return to looking at gold as priced in pounds which I haven’t done for quite a few months. In addition, I would personally favour physical gold or perhaps even gold shares priced the same way.

So since peaking close to £1,200 an ounce back in 2011-12, the price subsequently fell back to around £700 before we voted to leave the EU in 2016. Of course, since then the price rose sharply, back above £1,000, largely as result of the fall in the pound versus the dollar.

Now, at the beginning of the year that price was above £1,050 an ounce, but for the past few months, after falling back from there, it has been trading a sideways range – largely in between £950 and £1,025 an ounce- as I write, it’s close to £970 an ounce.

Do I see merits for the UK investor to hold a portion of their wealth in gold right now? Yes, I do, as it’s a hedge against a number of possible unforeseen outcomes, not least another lurch lower in the pound if there’s a clumsy EU departure, but against a downturn in the housing market and or the UK equity markets, all of which could hit at once.

More than that though, I think it’s is not just a bet on the pound or the UK markets in general, it’s also a trade in gold itself, which has taken a back seat from a ‘hot money’ perspective recently.

Perhaps we have the hot money flowing into digital currencies to thank for that? I am not sure quite honestly, but gold could find a way back to higher ground if the global equity markets do take a turn for the worse.

Perhaps the interesting thing over recent weeks and months is that fact that despite a significant further push higher in those equity markets, gold hasn’t really lost that much shine which means it could be ripe for a bounce if the opposite happens.

So, I think gold priced in sterling is most definitely an interesting proposition right now. Of course if the pound were to rise significantly at the same time as gold were to fall then this could make for a further move back through £925 an ounce, and may even threaten the 2016 lows near £700 an ounce.

So for that reason I would advocate only trading money that I can afford to tuck away for some time and money that isn’t readily sensitive to the immediate price.

Of course if the price subsequently charges back above £1,200 then a profit is always a profit, but one that could surely have further to run if it breaks above there again.

The post The merits of Gold priced in Sterling appeared first on The Daily Reckoning - UK Edition.

Take a guess at how many emails I’ve gotten with the word “gold” in them in the last week.

Now, bear in mind that I subscribe to every financial newsletter there is. So it’s a big number…

But still. I was surprised. I’d never have guessed I get 93 gold-related emails a week.

It goes to show gold has a grip on investors’ imagination. They want to know more about it. They want to understand it. They want to know to use it.

Recently I wrote about interest rates. Today, I want to extend my grand theory of interest rates into gold. Because understanding interest rates is the key to understanding gold.

It’s all about real interest rates

I said central banks have limited control over interest rates, that central bankers are free to steer rates the same way a driver is free to steer his bus off the road…

I said interest rates are really determined by the level of inflation and growth in the economy…

I said interest rates are probably going to stay fairly low for the next ten years…

And as a consequence, you could expect stock prices to stay relatively high.

I didn’t mention it at the time, but interest rates are crucial for gold. Historically, the real interest rate — which is the interest rate, minus the inflation rate — has very closely tracked the gold price.

I’ll show you a chart in a moment so you can see this for yourself. But why does this happen?

The real interest rate is a sort of barometer for the overall health of the economy. A high real interest rate means “I can invest my money and get a good rate of return, and when it’s time to spend it I’ll be able to buy more stuff”. Because of course, buying more stuff is the name of the game. High nominal interest rates and low inflation is the dream scenario, the sign of a healthy economy.

Sometimes interest rates are high but inflation is high too, like in the 1970s. Or sometimes inflation is low, but interest rates are low too, like now. Neither of these are ideal. In both scenarios, the real interest rate will low. Because when nominal rates are low or inflation is high, you can’t invest money, wait a while, and then use it to buy more stuff. An unhealthy economy.

Gold does well when the economy is unhealthy, and badly when it’s healthy.

When real rates are high gold goes down. Then real rates are low it goes up. It doesn’t really matter what’s causing real rates to change — it could be inflation or interest rates, or both together — what matters is the combination of the two.

In recent times real rates were very low in the 1970s due to high inflation — gold went up. Then inflation fell a lot and interest rates didn’t move much, from the 1980s through to 2008 — gold went down. Then nominal rates fell a lot, starting in 2008 — gold went up.

Here’s a chart showing how the two numbers interact. It shows the price of inflation-protected treasury bonds, which are a proxy for the real interest rates.

A 1% change in the TIPS yield has moved the gold price by (roughly) $400/oz since the data series starts in 2003.

This makes perfect sense. Gold is an old store of value, but it doesn’t pay any returns. So, when the returns on offer in the market dry up, gold gets more appealing.

To put it another way: the real interest rate, and the TIPS spread, is a sort of proxy for the amount of extra stuff you can buy in the future if you forego buying stuff now. When the market is booming and there’re loads of investment opportunities, that pushes interest rates up (more stuff in the future). When inflation is high, the price of future stuff goes up (less stuff in the future). The real interest rate puts those two numbers together.

The lower that real interest rate number is (ie, the less future stuff-buying you have to forego), the more you just want to put your money in gold, where at least it’ll be safe. Gold may not pay you any income. But it’s got a good long run record of holding its value.

All in all, gold is a sort of a barometer of the health of our contracts and law and promises based economic system. If the system is humming it should be able to generate 2% real returns for investors every year. If the system is broken in some way (either too depressed to generate returns, or too inflationary), that’ll show up in real interest rates. And gold will go up.

So there you have it. According to my theory, you buy gold when rates are about to drop or inflation is about to go up. When the system breaks down, gold keeps you safe.

The post This number determines the gold price appeared first on The Daily Reckoning - UK Edition.