Not being the kind that shies away from a good discussion, let’s jump in…
Lately the overall US market – stocks, bonds, futures, metals, everything – has been on the hunt for good news. We see it every time there is a whiff of good about anything – the market knee-jerks upward at any hint of positivity. In individual human psychology, this is a good thing, because positive people tend to be easier to be around, and definitely more fun to work with. We all know how a true grump can drag things down.
That’s great for the “inside world” of our little individual heads. But in the outside world of “everyone living and working together,” we need a bit of rationality. Not complete cold hardness, but common sense evaluation of the realities of our situation. Then we can use our positivity to decide on a plan of action that has a high chance of success.
Numbers and measures give us cold hard facts. Right now the facts ain’t looking so great. US new-employment numbers are down about 32% over last year, 145,000 vs 214,000. The fact that they’re up is good, but we know historically that the US economy typically runs about 175,000 at a minimum when sustaining a growing economy. So in the weary eyes of your friendly Gold Enthusiast, 145,000 just doesn’t cut it.
The other reality catching attention the past few weeks was the Federal Reserve needing to inject cash into the overnight banking system. Fed Prez Jerome Powell noted this in his public speech, so it happened. This just doesn’t happen in healthy, growing economies; when things are good banks have enough cash to loan to each other overnight to plug any shortfalls. And, Powell citing this as one reason why the Fed voted to lower interest rates is just more confirmation that it’s important.
“Everyone knows” that international markets are kinda weak right now. China’s economy has settled back a bit from it’s frantic overspending of recent years. As much of the world economic growth was generated by China’s build-and-grow efforts this past decade, it’s natural that the slowdown causes ripples felt ’round the world. The whole world can’t grow at the accelerated pace China put on, but then China can’t do that forever either. The problem is the world somehow got addicted to the flow of profits and opportunities China presented, and there isn’t really another big-growth story like that anywhere else right now.
And apparently no one is happy with “normal growth” anymore. I can’t find the reference right now, but back in the day (probably in the mid-80’s if this grizzled head is recalling correctly) some Biblical scholar pointed out that the economic “rules” mentioned in the Bible calculate out to 6% simple interest for loans and mortgages, and 2.5-3% growth would characterize a healthy economy. Sounds in the ballpark to us; so China’s 6-8% year-after-year pace would burn the candle out fairly quick, which it apparently has.
So a slowdown is in our future. Like they say, it’s not “if” a recession comes it’s “when”. And wise heads know “we trade the market we’re given”.
So your Gold Enthusiast, reading these signs, is actually expecting the Fed to lower interest rates one more time “soon”, quite possibly the end of this month if we don’t see some big-positive numbers soon. After all, once they’ve said “because we see signs of trouble on the horizon” you’ve blasted a pretty big hole to dive into.
It may work in a sense. The stock market might rally one more time. But if the real situation in the world is cooling off rather than sustaining or growing, it will likely drag the US economy down a notch. Especially since no politician in sight is talking seriously about reducing the Federal annual budget deficit. That alone is big enough to pull a stout ship under.
So if we see an interest rate reduction look for a short-term rise in stock prices, which would mean a short-term drop or stall in precious metals. But then you can expect a return to the upward rise of gold and other precious metals. Maybe not this month, but most probably in the next 2 or 3 months.
Signed, The Gold Enthusiast
DISCLAIMER: No specific securities were mentioned in this article. The author is long the gold sector via positions in NUGT, JNUG, a few junior miners, and covered calls on parts of the NUGT and JNUG positions. The author may initiate a new covered call position in NUGT or JNUG in the next 24 hours if market conditions warrant.
The SPDR Gold Shares (GLD) fell $0.64 (-0.45%) in premarket trading Friday. Year-to-date, GLD has gained 14.31%, versus a 9.52% rise in the benchmark S&P 500 index during the same period.
About the Author: Mike Hammer
For 30-plus years, Mike Hammer has been an ardent follower, and often-times trader, of gold and silver. With his own money, he began trading in ‘86 and has seen the market at its highest highs and lowest lows, which includes the Black Monday Crash in ‘87, the Crash of ‘08, and the Flash Crash of 2010. Throughout all of this, he’s been on the great side of winning, and sometimes, the hard side of losing. For the past eight years, he’s mentored others about the fine art of trading stocks and ETFs at the Adam Mesh Trading Group.