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Ira Epstein's Gold Report: Aug-4-2016

 -- Published: Thursday, 4 August 2016 | Print  | Disqus 

Over the past month the marketplace has gone through a lot in terms of:

  • Brexit
  • World Monetary Policy
  • US Presidential Nominees
  • A failed coup in Turkey
  • North Korean Tensions Escalating
  • China loses court battle in dispute over South Seas


Those who subscribe to my research know that I have written extensively about Brexit and what I think the ultimate outcome will look like.  Simply put, thereís no rush on the U.K.ís part to get out of the Eurozone but the politicians have to act on immigration and rights to immigrants to satisfy the voters. Look for the exit to be protracted, with lots of negotiations taking place over a long period of time. My personal expectation is for this to follow the path Norway took.

Norway is a member of the European Economic Area and has tariff-free access to the single market for most goods, but is outside the European Customs Union.


This begs the question of what is a customs union.


The Encyclopedia Britannica defines a customs union as ďa trade agreement by which a group of countries charges a common set of tariffs to the rest of the world while granting free trade among themselves. It is a partial form of economic integration that offers an intermediate step between free-trade zones (which allow mutual free trade but lack a common tariff system) and common markets (which, in addition to the common tariffs, also allow free movement of resources such as capital and labour between member countries). A free-trade zone with common tariffs is a customs union.Ē


If the U.K. follows something along these lines, the U.K. would incur additional administrative costs. This means that all goods entering the customs union would face pre-agreed to customs controls, mandatory paperwork and likely have extra duties to pay depending on the type of goods being entered and their origin. If the U.K. decides to go this route in order to deal with EU members, the U.K. will likely first resolve the customs union issues before it enters into any serious negotiations over non-EU bilateral trade deals. This is going to take a long period of time, but in the end expect something will get in place that allows the U.K. to easily enter into trade with EU partners. I expect nothing of serious consequence to be decided before year end, but that doesnít mean that public sway isnít taking place and that that sway wonít force the Bank of England to take action to show it has control of the situation. The bank might lower interest rates or even decide to launch another Quantitative Easing Package (QE). I doubt QE will occur at this as the Brexit fallout seems very muted right now.


Therefore, expect actions by the Bank of England to address business and consumer confidence, which have softened since the Brexit vote passed.


Monetary Policy


The U.S. Fed wants to raise rates but finds it hard to do so when most other central banks are either set to lower them or are lowering them. No major bank is raising rates just now. Be it the European Central Bank, The Royal Bank of Australia, The Bank of England or whoever, there are plans being discussed by them to lower interest rates.


Just today the Bank of England embarked on another round of stimulus by announcing;


Bank of England New Actions by Monetary Policy Committee

  • Cuts Bank rate to .25% from .50%
  • States could cut rate at next meeting again and implies could go negative
  • Announces measures to buy up to 60 bln Pound worth of government debt
  • Announces measures to buy up to 10 bln Pound worth of high grade corporate debt
  • Says outlook for growth in short to medium terms has weakened markedly

The question for the Fed is first why raise rates other than to normalize monetary policy and second,  how to keep them high when once the debt instrument is issued given that  buyers on the secondary market will likely show up in droves, buying the debt and driving the yields lower.


Gold is just now starting to benefit from years of monetary policies in a number of countries where the monetary policy was the primary means of jump starting the economies. This type of policy is now losing its punch, especially where interest rates have dropped into negative territory.  Each drop is clearly not having the impact of earlier drops, with some such as me questioning why central banks are continuing on this course when whatís needed is stimulus via government spending which puts funds directly into economies, not into banks.


A negative impact now showing up is the impact on insurance, banking, saving and retirement accounts.  Few figured on low interest rates lasting this long.


The longer rates stay absurdly low, the more damage to economies, which is friendly to gold.


North Korea


Planned war games will soon begin between the US and South Korea. Last month the US took the unusual step of adding North Koreaís volatile leader Kim Jung Un to a list that cut him off personally from the global financial system. More important, it placed him on a list with those personally responsible for human right abuses, which puts him in a camp with prison camp managers, guards and the like.  A real slap in is face is how he took it.


This caused him to declare that North Korea was at war with the U.S and in retaliation; he fired off a volley of missiles in July that was meant to show he is getting closer to striking the US and its allies.


Just yesterday, North Korea launched another ballistic missile that landed in the waters off Japan's coast. This prompted United Nations Security Council members Japan and the USA to call for an emergency session to discuss tensions in the region.


As mentioned above, the US and South Korea are due to begin military maneuvers later this month. I doubt the US and South Korea will back down on their scheduled maneuvers given the challenge by the North against holding them. At the same time Mr. Jong Un seems bent on creating trouble which means when the war games start, metal prices are likely to get a bid.


Turkey and China


The failed coup in Turkey took up a day or two of news and has resulted in thousands being arrested along with a major crackdown of rights in Turkey as the government grabs control.


Itís just a matter of time before China tests the will of the US and others in the China Seas as it continues to believe that those seas are theirs, regardless of recent world court rulings that came out otherwise.


Due to the unsettled nature of these events, they too present a lingering bullish shadow over gold.


Other Issues


The low price of WTI Oil, is also an overhang. This week it completed a decline that resulted in prices falling over 20%  from the most recent high.  At  first blush this is deflationary, but whatís going on is also that itís creating a serious cause of concern in financial markets. If oil drops too much it causes many producers to close their doors, incur losses, drive stock markets lower and so on. In addition, too low of a price will cause governments to cut back on social services which in turn can lead to social unrest and governmentís loss of its ruling powers.


As you can see there are plenty of reasons for gold prices to move higher. Below I discuss in detail chart action which from my perspective, lays an even stronger case for ownership.

Be it failing monetary policies, war, deflation or what have you, it appears that gold has made a low that I donít expect to be challenged for a very long period of time. Certainly not in the next couple of years if I am correct in my analysis.

The one kicker that I did not discuss was inflation. Given it doesnít exist in most western economies, why spend time on it. However, when it does kick in, it will be another bullish element for gold bulls to munch on.

Seasonal Chart

If you click on the above chart it will open the chart in your web browser.

I find it safe to say at this time that gold is not in a Bear Market, so Iíve eliminated the Bear Market  progression on the lower chart. Iíve left Bull Years and Neutral Years displayed, as the gold market in my opinion is clearly in one or the other.

 As you can see, there has been a tendency for prices to rally from the beginning of August well into September in both instances.

On the top chart, I display how prices have fared over 5-15 and 30-years periods.  Here the 5 and 15-year tendency is to rally well into September. The 30-year pattern does not show this pronounced a pattern.

Daily Chart with Price CountsÖcreated on April 13 2016

If you click on the above chart it will open the chart in your web browser.

Whatís important on this chart is that the PriceCounts are active to the upside with the first count coming in at 1418.7. If hit it could mean that prices might accelerate into year end, with price projections toward the mid $1500s.

Weekly Gold Chart

Price action is good as prices are not having a difficult time in staying over the 18-Week Moving Average of Closes.  What is bothersome on this chart is the overbought nature of the Slow Stochastic reading.  Countering this is that peaks and valleys take a while to form, so overbought conditions can stay that way for a while, but they rarely turn into  bullish embedded Slow Stochastic readings. When they do, the market soars and thatís  a real possibility going into yearend in my opinion.

Daily Chart

Like the Weekly Chart, the Daily Chart on December Gold has price action trading over its 18-Day Moving Average of Closes, similar to the weekly chart trading over its 18-Week Moving Average of Closes  and its Slow Stochastic reading is also overbought.

Therefore, both markets are in bull trends that for the moment are overbought. A key difference is that Daily Charts do embed much more regularly than Weekly Charts. Embedding means converting from being overbought to locking in a bull trend. This occurs when the two lines that make up the Slow Stochastic reading get over 80 and go sideways for several or more days.

At this point however, that process has not begun on this chart. The Slow Stochastic reading is simply overbought both by my standards and that of the less conservative theory of what is overbought followed by many Slow Stochastic students.


I believe it time to open your portfolio to ownership of gold

Bill Gross of Janus Capital just wrote a report where he basically says real estate and gold are where investors should look for value. He thinks stocks have risen too much as investors chase dividends, pushing values to an extreme. He sees little sense in buying of bonds, as the risk reward makes no sense. Other have voiced this same thing, including Jeffrey Gundlach of Doubline.

Simply put, zero to negative interest rates are not beneficial to western style economies. Youíre clearly not being rewarded for your savings, as your savings are not earning very much unless youíre taking large risks, which is not what theyíre supposed to be about.

I am not one of those who thinks the world is ending, nor do I want to live in a bunker if world economies implode and life as I know it ends. I simply donít have that makeup nor do I think an implosion of that sort will occur.

What I do think is that gold has bottomed out for the foreseeable future. In fact, I will be surprised to see it challenge the $1100 level anytime soon. Therefore, the question in my mind is how much upside it has, a question doomsdayerís always have answers to but one I donít.

What I see is upside opportunity that can carry gold toward the mid $1400s by year end and much higher next year as we enter a period of further frustration with monetary policies not working.

The solution to all this is probably something along line of government spending, helicopter money as it's called, to spur on economies. The monetary experiment saved the financial system in 2009, but now it's time for a change to get inflation moving along. In other words, economies must move onto something different from that of relying on Central Banks to save economies. The banks bullets are no longer as deadly as they were years ago.

Iíve looked at gold options as a way to get involved, given the marketís current overbought status. I along with the option specialists in my firm think they are too pricey. We looked at synthetic longs. Something along the line in the December Contract of buying the 1420 Calls and selling the 1300 Puts. If you do this the cost versus risk still makes no sense.

You could start to accumulate mini or micro gold on breaks, building a position over time, irrespective of chart action if you think gold is going higher.

You could start buying cash gold, but then you get no leverage.

Therefore, I prefer waiting to see if the Slow Stochastics embed on the Daily Chart which will issue a buy signal or if they donítí occur, weíll hopefully get a price correction to buy on.

If the 3rd PriceCount is hit, which is where I see prices ultimately going over time, it brings gold back towards $1800 an ounce.

I intend on being all over this market in terms of market recommendations being made very soon. It could happen shortly after tomorrowís Employment Data, if that data moves gold.

Get ready!

If you are not a subscriber to my market information, why not do so. The cost is low and the information is plentiful.

Market Research

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Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades may have not actually been executed, the results may have under-or-over compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.       


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