Gold was a popular topic in the mailbag this week. And one reader wants answers straight from master trader and Delta Report editor Jeff Clark.
But before we get to Jeff’s response, a quick update about the Mastermind training video he aired last night…
The replay is online for just one more day. So if you missed it yesterday, you’ve got a little bit of time left to watch it right here.
Now, let’s talk about gold…
Reader question: Jeff, are you looking for gold to go down further?
– George H. (Legacy Research member)
Jeff’s answer: Gold stocks haven’t done much over the past two months. The VanEck Vectors Gold Miners ETF (GDX) is trading today around the same level it traded for back in mid-October.
Some folks might consider that to be a good thing. After all, the S&P 500 has lost about 4% over the same time frame.
But gold stocks are often seen as a hedge against a broad stock market decline. So, the failure of the gold sector to rally as the S&P 500 has fallen is a bit disappointing.
However, the gold sector still looks bullish to me. In fact, it looks like GDX could kick off a big move any day now.
GDX is trading above all of its various moving average lines – the 9-day, 20-day, and 50-day. That’s generally a bullish setup for the intermediate term. More important, though, is that all of the moving averages have coiled together.
Energy is building for a larger move.
And, since we’re heading into a seasonally strong period for the gold sector (gold stocks often rally in December and January), the odds favor that larger move playing out to the upside.
There’s no guarantee, of course, that we’ll get an upside move. And we could certainly get some selling pressure in the gold stocks as we approach the December Federal Open Market Committee (FOMC) meeting later this month.
For the most part, though, this setup looks bullish.
Aggressive traders should be buying gold stocks here. I like the potential for a rally in this sector starting soon.
Jeff isn’t the only Legacy expert who’s bullish on gold right now. Strategic Investor editor E.B. Tucker is a gold industry insider, so we wanted to hear his outlook, too…
E.B.’s answer: I’m on the board of a company that buys gold royalties. I can tell you firsthand that the state of the gold market is beyond dire. But this is exactly the type of condition you see before a big rally unfolds.
The best indicator of a coming rally in the gold market is the gold-silver ratio. It measures the number of silver ounces it would take to buy one ounce of gold.
The average reading for the gold-silver ratio back to 2002 is 64. Today it sits at 85, a record high.
Why is that important? Because previous extreme highs in 2003, 2009, and 2016 all preceded major rallies in gold and gold stocks within months.
From 2004 to 2006, gold rose 85% after this ratio hit 80. From 2008 to 2011, gold rallied 171%. And in 2016, it rose another 28%.
Consider that for a minute. We’ve seen three very big moves in the price of gold in the 21st century. That’s one roughly every six years. We’re about due for the next one and it’s likely to be the biggest yet.
The best way to play the setup in gold today is by owning physical gold. We also recommend buying gold stocks.
Remember, these rallies are infrequent. They’re also large. Having small, appropriately sized positions that you can afford to hold onto is enough.
If you’re interested in taking Jeff and E.B.’s advice and adding some gold exposure to your portfolio, check out The Gold Book our team at Casey Research put together.
It’s a 48-page guide that shows you everything you need to get started as a gold investor, including a four-step checklist for finding the right coins for you… flexible storage options… and what to look for in a gold stock.
Read it for free here.
Moving on from gold, we’ve got another question for Jeff… this time about the good ole U.S. dollar…
Reader question: Jeff – Thanks for your timely advice over the last several months. My question – What is the catalyst that governs whether the dollar will fall or rise in value? Are there any foreign actions that control this, or is it all U.S. economics?
– Ray B. (Legacy Research member)
Jeff’s answer: There are really just two things that affect the value of the currency…
Its perceived safety, and
The expectation for interest rates.
In the world currency markets, the U.S. dollar is still seen as the safest currency. We’ll save for another time the argument of whether or not that should be the case. For now, when the financial markets get turbulent, everybody wants dollars. And tourists with U.S. dollars who show up at flea markets in any part of the world will likely strike a better deal than they’d get with other currencies.
Foreign governments can try to outlaw the selling of goods and services in U.S. dollars, or they can try to “peg” their domestic currencies to some fixed rate of dollars. But, if demand for dollars far exceeds the supply, then an underground currency market forms (think of Argentina).
So, for now at least, the perceived safety of the U.S. dollar isn’t an issue affecting its price.
The strength or weakness in the dollar is almost entirely a function of interest rates – or rather, the expectation for interest rates.
If interest rates in the U.S. are expected to increase, then the dollar will strengthen. Foreign currency traders will sell their local currencies that are receiving low or falling interest payments. And, they’ll buy dollar denominated investments that are receiving high or rising rates of interest.
If currency traders expect interest rates to fall, then they’ll sell their dollar-backed investments and switch to alternative currencies.
Indeed, it’s the expectation for higher interest rates that has helped to keep the dollar strong all year.
Now, though, as we head into the December FOMC meeting with the expectation that this might be the last interest rate increase for a while, the currency markets are getting interesting.
If the market begins to discount the possibility the Fed won’t increase rates in 2019, or that it might actually lower rates, then the dollar is likely to fall.
On the other hand, if the Fed signals that more rate hikes are in the works for 2019, then the buck will likely press even higher.
Jumping from fiat to digital currencies… It was a quiet week for cryptos. But we did get one good question… so we turned to Palm Beach Confidential editor Teeka Tiwari for an answer…
Reader question: I wanted to ask if Teeka could address the possibility of the crypto market being manipulated. He says often that we let the market do what it will do, and we wait. However, I’ve read that the market is and can be manipulated – by groups that can implement pump and dump schemes, wash trading, dark pool trading, whale trades using buy and sell walls, etc.
If this is true, then does it matter how organically we work with the market if prices are being manipulated? Could he shed some light on this?
– Barbara B. (Legacy Research member)
Teeka’s answer: On the day JPMorgan Chase CEO Jamie Dimon said he’d fire any trader buying bitcoin, the price of bitcoin dropped. We came to find out that JPMorgan Chase traders in London used that weakness to load up on bitcoin.
That’s only one instance of manipulation that we know of. I’m sure there have been – and will continue to be – many others.
As individual investors and speculators, we must face the fact that we cannot stop market manipulation. Every day, multibillion-dollar-valued public companies are manipulated by trading firms on Wall Street.
Just because manipulation exists doesn’t invalidate the investment case of the underlying asset. What it means is that we have to pay special attention to our research, buy-up-to prices, and position sizes.
Doing great research does the most to nullify the impact of manipulation. Having a buy-up-to price helps mitigate overpaying. Sensible position-sizing gives us the emotional strength to handle the downside volatility that can sometimes come from overt and covert manipulation of crypto assets.
So to answer the question, yes, manipulation exists, but we have the tools to weather it… Do in-depth research. Use a buy-up-to price. Use small, uniform position sizes across your portfolio.
Finally, one of your fellow readers has an unusual inquiry about South Africa.
Our globetrotting geologist and editor of International Speculator – Dave Forest – has been there many times over the years, so we put the question to him…
Reader question: In the category of hated most and less hated… Is South Africa ever worth the risk or at what price is it worth the risk?
– Bob K. (Legacy Research member)
Dave’s answer: Doug Casey often speaks of South Africa as the first place he made big profits in gold mining stocks, buying them in 1976 when gold prices were languishing at a cyclical low. Doug did extremely well on these companies during the gold bull run of the late 1970s. But it’s instructive to look at how cheap they were…
When Doug bought these South African gold companies, they were paying annual dividend yields of up to 75%. Today, a South African gold stock like Sibanye-Stillwater is yielding 9%. That’s well above the S&P average of just under 2%, but not so much so that it’s a lock to be worth the risk.
And that risk is only growing in South Africa. Increased requirements for black ownership, rising taxes and levies, and ever-present corruption are just a few of the headwinds for companies there.
Almost anything can be a good buy if it gets cheap enough, but South African stocks generally aren’t well-priced right now, given the political challenges in the country.
That’s all for this week.
Have a nice weekend… and Happy Hanukkah to all those who celebrate it.
P.S. As a Daily Cut reader, you already know just how evil Google and Facebook can be. Well, Legacy Research friend and Emmy Award-winning reporter John Stossel just released a YouTube video titled, Google and Facebook Cross “The Creepy Line.” It’s definitely worth watching…