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Did Gold Reach a Major Turning Point Last Week?
Last Tuesday, gold fell to $1148.20 on St. Patrick’s Day, followed by a four-month low of $1147 on the London pm fix on Wednesday, March 18. At the time, it seemed that gold was in danger of falling below its four-year low, set last November 6, at $1142 per ounce (basis London close). Oil also fell to a six-year low below $43 in the middle of last week. The main culprit for both price collapses was the strong dollar.
The U.S. Dollar Index was born in March, 1973, soon after the world’s currencies were allowed to “float” (i.e., to find their fair market value via international trading, rather than being set at fixed rates to each other). The Index was set at “100 = March, 1973.” The index fell during the rest of the 1970s, but then it soared to an all-time high of 164.72 in February of 1985. Its low was set at 70.698 on March 16, 2008.
The dollar’s most recent peak came at 100.7 on March 15, 2015. As of last Wednesday, March 18, the index was still over 100, reflecting a 27% rise since last June 30 and a 42% rise since March 16, 2008.
Then the markets went berserk.
The March 18 FOMC Meeting Threw Markets into a Buying Frenzy
At 2:00 (EDT) on Wednesday, March 18, the Federal Reserve released their monetary policy statement, followed by Fed Chair Janet Yellen’s press conference from 2:30 to 3:30, in which she was fairly firm in saying that the Fed’s decision would be “data dependent” and they would not be tied to a specific date.
After the statement was released, gold shot up from $1150 to $1170 in minutes. The price of gold kept rising to $1178 that evening before consolidation to $1170, then rallying above $1180 by week’s end.
The other markets responded in similarly dramatic fashion. The Dow Jones index gained over 300 points between 1:35 and 2:15 pm Wednesday, and a 440 point gain in less than 2-1/2 hours. The Dollar Index fell 2.5%, helping the gold and oil markets, since commodities are universally priced in U.S. dollars.
This dramatic turnaround was reflected in two consecutive daily headlines in The Wall Street Journal:
Wednesday, March 18 headline (reflecting Tuesday’s expectations): “Higher-Rate Expectations Tarnish Gold: Precious metal falls to 4-month low as the strong dollar cuts investor’s appetite for it.”
On Thursday, March 19 (reflecting Wednesday’s realities): “Investors Celebrate Gentler Tone from Officials: The Fed has to Buck Up on Interest Rates, Given a Too-Strong Dollar.”
The Wednesday article said that “Odds of an increase happening at the Fed’s July meeting rose to 42% on Tuesday, up from 38.4% a month ago, according to federal-funds futures data from CME Group.” After the Fed meeting, however, investor expectations for a rate rise by July fell to 23%. Expectations of a rate rise by September fell from 60% on Tuesday to 39% on Wednesday. Fed fund futures have now priced in expectation that the first Fed rate hike will occur in October rather than June, July, August or September.
The Fed’s cautionary words came as no surprise to us. At Navellier, we have often written that the Fed has no reason to raise rates any time soon. Consider these essential arguments against raising U.S. rates:
(1) The U.S. dollar is already super-strong at the current low rates. There is no need to attract more attention by raising rates. Raising rates raises the risk of deflation – an economist’s worst nightmare.
(2) There is no sign of inflation. The Producer Price Index (PPI) has fallen for four straight months. In the last 12 months, the PPI is down 0.6%, the first time the PPI has ever declined over a full 12 months.
(3) The economy is slowing. Retail sales have declined for three months in a row. The Atlanta Fed now estimates first quarter GDP growth at only 0.6%. A rise in rates would tend to slow the economy further.
(4) Higher interest rates would raise the cost of financing our huge ($18 trillion) federal debt, deepening federal budget deficits. A 1% rise in rates would cost taxpayers $180 billion more per year.
In addition, most of the voting members of the Federal Open Market Committee (FOMC) are “doves” (favoring easier monetary policies). Janet Yellen is the Queen of the Doves. Among other leading Fed officials, the Presidents of the Boston, Chicago and Minneapolis Fed have all stated that the Fed should not raise rates this year. Despite these statements, investors seemed “shocked” when the Fed refused to be backed into a corner of predicting or “indicating” any rate increases in the near future. This is one way you can make money – by profiting from the misconceptions of the masses and TV’s “talking heads.”
St. Patrick’s Day is a “Red-letter” Day in the Long-term Battle between Gold & Greenbacks:
In addition to the dramatic rise to $1,000 gold and $20.92 silver on March 17, 2008 – the dollar’s all-time low, here are three other important battles between gold and Greenbacks during mid-March in history:
- On March 17, 1862, the U.S. Treasury abandoned the gold standard by sanctioning the first two issues of Greenbacks, which were not tied to any promise of redemption in gold. As the nation entered its second year of a suddenly-long and costly Civil War, governments of both North and South found it necessary to replace their scarce gold with cheap paper money. By war’s end, the Union printed $450 million in greenbacks. The natural result was runaway inflation by war’s end.
- On March 14, 1900, President William McKinley signed The Gold Standard Act, which established gold as the sole basis for redeeming paper currency. The act set the value of gold at $20.67 an ounce, providing the basic value of classic U.S. Gold Coins minted from 1900 to 1933.
- On March 17, 1968, during another costly war, the link between gold and greenbacks was once again severed. In early 1968, LBJ’s “guns and butter” policies led to a hemorrhage of U.S. gold at $35 per ounce. On Sunday, March 17, the seven nations of the London Gold Pool agreed on a two-tiered gold price. This was the first step toward an abandonment of gold and the free-floating of currencies in the 1970s, leading to a long and costly bout of inflation that lasted until 1982.
Did Last Week Mark a Major Turning Point for Gold?
Is it too delicious a coincidence to point out that St. Patrick’s Day has sometimes marked a major turning point for gold and the dollar? The Dollar Index set an all-time low on March 16, 2008, after Bear Stearns was bailed out. The next day, March 17, gold closed above $1,000 per ounce for the first time, closing at $1,011 in London and $1,000.40 for the nearby futures contract in New York. Silver closed at $20.92, its highest level since 1980. But as the U.S. financial crisis unfolded in the fall, gold fell to $712 in October of 2008. Gold would not close above $1,000 again until September 8, 2009 – almost 18 months later.
If the U.S. Dollar Index fails to recover to 100, then last Tuesday’s peak could mark the end of an exact 7-year bull market in the U.S. dollar. The number “7” has some significance for gold and the dollar, since there have been three full bear and bear market cycles of the Dollar Index in the 42 years since it was launched in March, 1973. That works out to an average of seven years per bull or bear market cycle.
U.S Dollar Index, 1973 – 2013
If you look back at the chart at the top of this article, you’ll see three bear markets in the U.S. Dollar Index (1973-78, 1985-94 and 2001-2008, averaging seven years, with an average Index decline of -41%). The three bull markets in the Dollar Index (1978-85, 1994-2001 and 2008-15) also averaged seven years.
The fate of the dollar is the major “wild card” when projecting the future price of gold in the U.S. The fundamentals (rising demand, limited supply) favor gold, but the rise and fall of currencies is the way we measure gold in terms of our government-printed paper. In the seven years since the dollar bull market began on March 17, 2008, the dollar price of gold us up just 14.8%, but gold is up 73.3% in euro terms:
Most of the dollar’s gains have come since last July. On June 30, 2014, the euro traded at $1.37 and the U.S. dollar index sank below 80. Since then, the price of gold has fallen 12.7% in dollar terms, but it has risen by a mirror image of +13.5% in euro terms. With negative interest rates in Europe, investors across the pond are pouring their euros into gold for superior total returns. The same is true in other chronically weak currencies, such as the Brazilian real, Russian ruble or Ukrainian hryvnia. American financial journalists and other “experts” tend to be blinded to the fact that gold is still rising – outside of the U.S.
What if the Fed keeps procrastinating on the raising of rates until 2016 or later? What if March 17, 2015 turns out to be the peak for the Dollar Index and a “double bottom” chart formation for gold? (The $1142 low last November and the $1147 low last week form a classically bullish “W” chart pattern.) If the Fed fails to raise rates by late 2015, that could cause the dollar to decline, pushing gold up in dollar terms. We can’t make this prediction with any amount of confidence, but the dollar could be near a cyclical peak.
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