Rickards On Gold, Interest Rates, & Super-Cycles

Tyler Durden's picture

Authord by James Rickards via The Daily Reckoning,

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.

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

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

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.

But more importantly, gold has held its own despite higher interest rates and threats of more.

That tells me we’re seeing a flight to quality, meaning people are losing confidence in central banks all over the world. They realize the banks are out of bullets. They’ve been printing money for eight years and keeping rates close to zero or negative. But it still hasn’t worked to stimulate the economy the way they want.

So gold has been moving up in what I would consider a challenging environment of higher rates. 

The question is, where does gold go from here?

The market is currently giving close to 100% odds that the Fed will raise rates next month.

I disagree. I’m skeptical of that because of the weak inflation data. There will be one more PCE core data release before the Dec. 13 meeting. That release is due out on Nov. 30.

If the number is hot, say, 1.6% or higher, that will validate Yellen’s view that the inflation weakness was “transitory” and will justify the Fed in raising rates in December.

On the other hand, if that number is weak, say, 1.3% or less, there’s a good chance the Fed will not raise rates in December. In that case, investors should expect a swift and violent reversal of recent trends.

Markets have priced a strong dollar and weaker gold and bond prices based on the expectation of a rate hike in December. If that rate hike doesn’t happen because of weak inflation data, look for sharp rallies in bonds and gold.

Now, the last time gold sold off dramatically was on election night, when Stan Druckenmiller, a famous gold investor, sold all his gold. It’s only natural that when someone dumps the amount of gold he deals in, the price will go down.

That move reflected a change in sentiment.

What Stan said at the time was very interesting. He said, “All the reasons that I own gold in the first place have gone away because Trump was elected president.”

In other words, he was buying into the story that Hillary Clinton would be bad for the economy but Donald Trump’s policies would be beneficial. If we were going to have strong economic growth with a Trump presidency, maybe you didn’t need gold for protection. So he sold his gold and bought stocks on the assumption that the economy would grow under Trump.

But earlier this year, Stan has said he’s buying gold again. What that means is that people are finally reconsidering the reflation trade. Tax reform is still a big question mark. And when’s the last time you heard a word about infrastructure spending?

Investors will once again flock into gold once reality sets in. Mix in rising geopolitical tensions in Asia and the Middle East, and gold’s future looks bright.

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zorba THE GREEK's picture

Gold is money, everything else is debt

secretargentman's picture

Well... not EVERYTHING else. In fact I can think of quite a few things that aren't debt.

IH8OBAMA's picture

There's a hundred ton solid gold astroid somewhere in the astroid belt between Mars and Jupiter.  If we could just get that puppy heading this way a little bit.

 

stacking12321's picture

yes, and direct it straight at washington, they could use the gold to try to balance the budget

RAT005's picture

Had an idea about the "shortage" often described while comex and other exchanges are allowed to persist with their 100:1 and more rehypothification.  The shortage is at the manipulated comex spot but no one will pay a higher premium to source.  Kind of like a limit order, you can specify delivery or price but not both.  No one wants to break Comex and such because that is where the low prices are coming from.  So there is a line to buy at the manipulated discount but no interest to damage the manipulation machine.

For instance I have an order in of sorts to buy USA Junk Silver at $16.60 plus a current low premium.  Maybe it fills, maybe it doesn't.  Maybe if it stays at that price long enough supplies will get tight and the premium goes up a little.  But Comex never gets touched via my order.

Stuck on Zero's picture

It's no mystery why gold goes up when the Fed tightens. The Fed message is: "Oops, inflation is starting to roar better tight things up."

giovanni_f's picture

There is a global scheme favouring the large physical souvreign buyers and paper gold casino operators. The former have no interest in gold prices rising in an uncontrolled fashion AT ALL. The latter need volatility to milk the large and some small specs. For them it makes no difference to work the "market" from the short or long side but they need to be compliant with the goals of the government (enforced by the so-called "regulators") while extracting their billions from the sucker specs, mining companies and their shareholders.

The only party interested in a high gold price - and these are the real fucked ones in the current low price scheme - are the gold miners plus their share holders (dilution, low dividends), their employees, the host miner's countries - and these have no influence on the regulators. 

Theosebes Goodfellow's picture

~"Gold is money, everything else is debt"~

Actually...,

"Money is gold, and nothing else." ~ J.P. Morgan, (testifying before Congress in 1913)

What's in your wallet? /r

BigJim's picture

 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.

Yes, it must be true, King World News has been saying exactly that for a decade.

CIABS's picture

Does anyone have a biography and pictures of Eric King?

Katos's picture

They'd just STEAL it!! THEY certainly wouldn't use it to balance the budget!

stacking12321's picture

yeah they would

but i was commenting more about directing the solid gold meteor directly at washington...

DIGrif's picture

Use preparation H.....isnt that what Dr. Evil used from his sub????

Justin Case's picture

t’s finally coming. An escape pod for holders of bitcoin.

As we know, if holders wanted to sell in a panic, there would be no real bid. I’ve heard it said that if one large seller were to hit the market, the bid for bitcoin would drop to a penny!

So everyone is sitting with bitcoins trading at $7,000 to $8,000 a pop. Could bitcoin rise to $50,000? Perhaps.

But any real selling would see the bids drop away in seconds.

What to do?

Why not establish a bitcoin futures market where you can hedge your long position and protect yourself in a massive downdraft.

Short the bitcoin futures and voila!, your protected.

The real problem that arises is someone on the other side of trade will get badly burned.

Futures markets are notoriously highly leveraged.

Imagine bitcoin dropping $8,000 in minutes, or $50,000, with no bid in sight.

How do the longs in the futures market escape?

This could be dangerously close to triggering a financial collapse. Not dissimilar to the mortgage derivative plays in 2007.

Wanna bet the FED rescues these culprit speculators with our hard earned money?

CIGA Wolfgang Rech

stacking12321's picture

oh, please.

i like jim sinclair, and wolfgang often has insightful comments regarding gold, but when jim and wolfgang attempt to discuss bitcoin, they are out of their league, and uninformed on the topic.

 

Oracle of Kypseli's picture

best way to get out is to buy with bitcoin (if you can) a very expensive item, like a yacht a car, gold, famous painting etc. Thus, it will be a transfer rather than a cash out. 

webmatex's picture

I noticed that but if - like them you've amassed a fortune in PM's and mining would you put it in BTC?

You cannot blame their prudence - they have it and prefer not to trade.

If i had their stash i would do the same.

stacking12321's picture

i don't think it has to do with being conservative in their investments, i think it's more a bit of old-fogeyism, why those young whippersnappers with their i-phones and their bit-coins, i don't trust it, nosiree bob!

 

RAT005's picture

The theory is that lack of futures (shorting) is what enables Bitcoin to keep rising.  There is no way to leverage it down.  Some like to say it is how gold and silver would trade if it weren't for Comex and such where any amount of paper necessary floods the market to destroy momentum and hold price down.

Raffie's picture

Gold will rocket up to $1300 then roll over and go back to sleep in the 1260 to 1290 range for couple of years.

Then it will toss and turn up to $1350 then roll back over and go back to sleep in the $1300 range for more years. 

History shows how the small gold increases go, not even keep up with cost of living or much else.

Keep stacking kids, 3-4 generations from now might see PM be worth something like we been hearing about for many decades. 

I got stacks, but not a lot of faith in it. 

 

ljag's picture

Just when I was getting the hang of that thingy called percents......you come along and ruin it. I bot AU in 2000 for cheap! Like $3-400 per oz. I could have sworn I made a decent ROI....guess not.

Ajax-1's picture

Considering that there are massive gold shortages, it only makes sense that the price continues to go down. Sarc.

MaxFreedom's picture

Is Rickards misstating Rogers' outlook on Gold?

Based on past interviews, it would appear that Rogers believes that Gold will fall 50% from it's high of 1900 plus.  In other words, below 1000.  Before heading higher.

83_vf_1100_c's picture

  Been reading $700, 800, 900 AU on ZH for a few years. I am good with it, got spare fiat to load up at fire sale prices. Assuming the Chinese leave any for us lowly Americans.

SJEqualizer's picture

Hell yeah.  I keep thinking about my buddy, who's younger than a boomer, and needs to build his stack to protect against the bullshit debt that his ancestors created.

Let the fake value drop, and let the young slaves convert fiat lies into sound money.  The boomers who lived through the cultural demise of the 60's, and did nothing to fight the Marxism, can eat a fucking dick.

HRClinton's picture

Rogers? You mean "George Soros's former biz partner"?

Yeah, sure, like I'm gonna listen to him.

I love how these guys make sweeping statements, without backing them up with anything you can analyze or refute. That's how you can tell that they're in Sales mode.

There's a Hopium guzzling Libertarian born every 10 minutes.

TheLastTrump's picture

Fuck You James Rickards, sounds like same propaganda from last time- 2011.

Raffie's picture

Rickards batting average NO ES MUY BUENO.

FreeShitter's picture

Trump has him beat 0-14

Ben A Drill's picture

The FED’s Achilles' heel is gold and silver.

MGA_1's picture

Think I heard this a couple years ago....

hadriansnightmare's picture

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

My great grandkids will be thrilled.

bshirley1968's picture

And if your great grandfather had of laid up gold for you, think where your family wealth could be today.   That is how wealth is built.....in real savings. 

Or you could just keep gambling to be wealthy as possible in your time by playing in the banker's paper.  Hopefully your posterity won't end up paupers. 

HRClinton's picture

Rickards & Rogers. "On Golden Swamp" Realty.

If they truly had brains + integrity, they'd have shouted "PEAK GOLD!" 5 years ago.

As it is, they are paid shills for Bullion sellers, who thrive or starve on Spreads and Commissions.

Sorry, we don't need PM Friction Losses, when it comes to Money or Stores of Value.

HRClinton's picture

Peeps run to BTC, because Gold and gold shills have failed them. 

BTC is where Gold would be, if it weren't being 95% manipulated.

Who in their right (or left) mind would park their hard earned money in a MANIPULATED asset? Who?  Flat Earth Hicks, that's who!

Clock Crasher's picture

People who looked at the 100 year linear chart of public debt.  

They failed to calculate that 0.001% of the population realizing this problem would fail to move markets. 

"Not one man in a thousand".. and that is being very very generous. 

Its been close to 600 days since gold made it's 2016 high and has failed to come close to challenging that mark.  

If you had dry amo left I'd be waiting for single digit silver, but at this point why bother? 

Silver Savior's picture

I park my money in gold and don't want bitcoin at any price.

Clock Crasher's picture

In the fog of the next finacial war TPTB are going to obliterate the paper gold price and thus destroy all mining. 

2016 H1 rally was a bull trap.  Oh look Gold is putting in a multi year base -NOT!

Clock Crasher's picture

Watch this.  Hold my bag- I mean beer. 

-Jim Rickards

squid's picture

There is no solid gold asteroid, gold is rare on earth because....mpwait for it...

It's rare in the universe. Why? It's fucking difficult to synthesise. In the seventies when the fusion fantasy was full bore they said that they'd be able to synthesise gold because they could fire a laser for 10 microseconds and take hydrogen to iron. Well? 45 years have gone by, where's the gold?

 

The reason you can easily synthesise iron is the same reason there Is so much iron in the earth's crust....its easily made by nature and by us.

 

Dah!

 

Gold? And don't think physicists have not been trying, they can't do it. And it has to do with the very reason we admire gold so much, it doesn't tarnish because it reacts to only one thing, cyanide. It doesn't react to oxygen which makes it completely unique. That is why its alway shiny. It's also the reason it's near impossible to synthesize.

 

Gold, God's money, you either have it, or you don't.

 

Squid

turkey george palmer's picture

There has to be liquidity for asset appreciation. Whoever it is that has liquidity is not hoarding gold now. So when liquidity dries up the price will fall off like last time.  After that whatever cash they can raise will go to gold and tangible assets.

unirealist's picture

What Bitcoin is doing, Gold should be doing.

It's not, because paper gold controls the market and sets the price.

There is no paper Bitcoin.

If there weren't paper gold, the price would be ten-thousand an ounce now, if not higher.

But as long as investors are willing to transact paper gold instead of real gold, the bullion banks/PPT will control the price, and it will go nowhere.

They like the price capped at about $1275.

I don't expect it to go above its recent range unless the SHTF and Mad Max wakes up.  

Yellow_Snow's picture

"Investors will once again flock into gold" -Jiminy Rickitts

I thought you said that 7 years ago... 5 years ago... 3 years ago...

Just BUY MY GOLD damn'it...

kahplunk's picture

some of us did at 1050 and have been happy about it.

soyungato's picture

"  there are physical gold shortages popping up, and that refiners are having trouble sourcing gold.  "

 

There is always tungsten.

Jack Oliver's picture

I mean - If the Rothschild's want an easily manipulated 'currency' - rather than - say - CASH !!!

What would they do to eliminate CASH and create a 'cashless' society ???

They would probably trade your CASH for something 'intrinsically' FUCKING 'worthless' !!!

Something like 'Bitcoin' !!!

Because they KNOW that the 'average' investor has been so FUCKING 'dumbed down ' that they would fall for any FUCKING thing !!

Even that jihadi FUCKING sham - ISIS !!!

moman's picture

Jack, could have not said it better.

katagorikal's picture

There's also a big queue for bitcoin,
currently 45,000 pending transactions:

https://blockchain.info/unconfirmed-transactions

Ajax-1's picture

WINNER WINNER CHICKEN DINNER. That is precisely why Bitcoin will never go truely maninstream, The transaction times take way too long and there is really no way of speeding it up due to algoithmic complexities. Nobody want to go to Starbucks to buy a cup of coffee and wait another 15 minutes for the point of sale (POS) transaction to be completed.