Why Everyone’s Wrong About Gold’s Drop Yesterday

Posted On Oct 5, 2016 By Dave Gonigam

  • In lieu of an explanation why gold tumbled yesterday…
  • … we reveal what wasn’t the reason
  • And those bogus reasons provide clues to gold’s next big move
  • Revenue-hungry states and cities lick chops at a new target
  • Reader attacks “crazy” Jim Rickards statement… when editors’ advice conflicts… gold as the “overwhelming share” of one’s retirement… and more!

If you’ve come to us today looking for a clean and simple explanation why gold got whacked yesterday… we’re afraid we’re going to disappoint.

The Midas metal has stabilized as we write today, near $1,270. As we noted in real-time yesterday, gold took a $43 tumble starting the moment the Comex opened in New York, at 8:20 a.m. EDT.

Again, clean and simple explanations are elusive: We wish we could tell you JPMorgan Chase CEO Jamie Dimon barked out everyone’s marching orders over the phone at 7:45 while soaking in the marble tub of his master suite. Alas, the evidence isn’t there. (Which doesn’t mean it didn’t happen, heh.)

We can, however, do the next best thing. We can tell you what didn’t trigger the selling. Indeed, we can unpack a widely held misperception that suggests a dramatic reversal of yesterday’s move before year-end.

This morning’s Wall Street Journal channels the conventional wisdom thus: “The precious-metals declines were driven in part by the autumn resurgence of the dollar, reflecting the gradual improvement of the U.S. economy.”

Really? What the Journal calls an “autumn resurgence” looks like a mild rise on a one-year chart of the U.S. dollar index. The DXY, as it’s known, is a highly flawed measurement; it’s dominated by the euro, and it excludes any emerging-market currencies. But when financial pros speak of a “strong” or “weak” dollar, the DXY is their usual reference point:

And about that “gradual improvement of the U.S. economy”: The International Monetary Fund just slashed its growth forecast for the United States. Again.

The previous forecast in July called for 2.2% growth during 2016. The latest forecast, out yesterday, has been hacked down to 1.6%. Growth of 2.2% will have to wait till next year, sayeth the IMF. Until that forecast is cut too, natch.

But there are facts, and there is the “expert consensus” — expressed in the Journal article by one Ira Epstein, strategist at the Linn Group: “The market is coming to terms with what may be a new burst of dollar strength and a U.S. economy that is strong enough to bear an interest rate increase. This is where you step away from gold.”

Which brings us to yet another flawed assumption, says Jim Rickards: “The flaw is that a Fed rate hike is a sign of economic strength. Normally, that would be the case, but not this time.”

As Jim pointed out as recently as yesterday, the Fed desperately wants to raise rates so it can lower them again when the next economic/financial crisis inevitably rolls around.

But a December rate increase — which Jim foresees — will be the wrong move at the wrong time. “A rate hike is a replay of the Fed blunder in 2015. By raising rates while the economy is still weak, the Fed will cause a stock market correction (or worse) and cause a flight to gold as a safe haven — exactly what happened in December 2015, the last time the Fed hiked rates.

“Once the stock market tanks and the economy flirts with recession (if we’re not already in one), the Fed will quickly revert to its dovish mode and start to weaken the dollar as part of the ongoing currency wars. Then gold will be off to the races again, with miners going up even more.”

Besides, it’s not as if a flood of new gold supply is coming from the world’s mines which would be a logical supply-and-demand argument for lower gold prices.

Heck, while gold was selling off yesterday, there was a dirge of bad news from global mine sites, says Byron King, senior geologist for Rickards’ Gold Speculator.

“In the space of a single day, Barrick Gold announced that mining operations at its Veladero site in Argentina will remain suspended, pending cleanup of a chemical spill. Freeport-McMoRan Inc.’s Grasberg mine in Indonesia was hit by a major strike, with over 1,000 workers downing tools and walking off the job. And Goldcorp announced a shutdown of operations at its flagship Peñasquito mine in Mexico, due to labor issues.

“The sum of these incidents is short-term negative to each individual company, but the news also points to the trend of lower gold mine output across the industry, and highlights the risk spectrum to gold mining in general. In other words, one could be forgiven for thinking that gold prices should go up, not down.”

Meanwhile, “Yesterday’s drawdown was also a reflection of ‘weak hands’ getting washed out,” Jim Rickards adds.

“The weak hands are those in the paper markets (such as gold futures and ETFs) who are using margin or derivatives (such as options). Their losses are magnified by embedded leverage, and they are forced to put up fresh margin money or face liquidation. Often, these weak hands dump their positions as fast as possible. That selling begets more selling, which feeds on itself, and so on until the market finds a new level.

“What do we make of this all? If we were looking at a fundamentally sound economy with higher nominal and real interest rates and a strong dollar, this would be a bad setup for gold. But we’re not. We’re looking at a weak economy and a Fed about to make things worse by raising rates at the worst possible time. The rate hike, strong dollar scenario is strictly temporary. Soon the reality of lower growth, lower rates and a weaker dollar will sink in. Then gold will make up today’s lost ground and surge higher.

“I was on a conference call yesterday when I first noticed the price action in gold. As soon as I finished that call, I dialed my dealer and bought more physical gold. I consider this lower price point a gift and an opportunity to add to my allocation at an attractive level. You should too.”

[Ed. note: In fact, Jim’s conviction level is so high, his “double gold” offer is still in place through midnight tomorrow night. To date, Jim has mailed over $1.2 million in gold to readers. To learn how to claim yours, and benefit from the exclusive recommendations of Jim Rickards’ Gold Speculator With Byron King, follow this link. Reminder: This link will expire tomorrow night at midnight.]

While gold gets its bearings, stocks are in rally mode: The major U.S. indexes are up roughly a half percent, the Dow looking strongest at 18,282. Treasuries are selling off, the yield on a 10-year note now 1.72%.

Crude is rallying hard: As we check our screens, a barrel of West Texas Intermediate is up 2.5% and only a dime away from $50 — a level briefly reached three months ago. And that’s despite a less-than-expected drop in inventories reported by the Energy Department in its weekly numbers.

From our new-taxes-and-weird-fees file: States and cities are casting a long and hungry look at some of the more, umm, profitable nonprofits.

City leaders in New Haven, Connecticut, are looking to change state laws — the better to impose property taxes on Yale University.

“They aren’t alone,” reports the publication Stateline. “City and state officials in other parts of the country, including Maine, Massachusetts and New Jersey, also are questioning whether they can continue to allow wealthy schools like Yale, or big nonprofit hospitals, to remain off tax rolls while they scramble for money to pay for police, fire, streets and other infrastructure and services. In some cases, they are looking for ways of taxing what until now have been tax-exempt sacred cows.”

No, we won’t shed a tear around here for universities and hospitals rolling in dough; when it comes to using government favors to extract money from everyday Americans, no one holds a candle to higher ed and health care.

But we pass the item along as a sign of times; better this than what’s happening in your editor’s former stomping grounds of Chicago. There, water and sewer fees are being jacked up 30% — not to pay for new pipes, but to bolster city pensions. Oy…

“Are you crazy?” a reader writes, addressing Jim Rickards’ remarks here yesterday.

These remarks of Jim’s specifically: The Fed “definitely wants to raise interest rates. The reason is that it is years behind the curve in terms of normalizing interest rates to at least the 3.25% level, if not higher. The Fed should have raised rates in 2010 or sooner. If it had, rates would be at 3.25% today and the Fed would have some dry powder to fight the next recession.”

Counters our reader, “The Fed cannot control interest rates on the long end. If the fed funds rate goes to 3.25% while the 10-year Treasury is at 1.7%, there will be a recession — a severe recession. Every time short rates rise above long rates three months in a row, there is a recession.

“Every time!

“The only way the Fed can raise interest rates is by auctioning off a portion of the long end of their balance sheet. Meaning reversing QE.

“It’s time to fire Rickards. He’s wrong. He’s been wrong, and he will always be wrong.”

The 5: Aw, c’mon. Jim knows all about inverted yield curves and recessions.

Implicit in your criticism is that the 10-year T-note would be at 1.7% today if the Fed had started a rate-raising cycle in 2010. That’s a tall tower of assumptions you’ve built there.

By the way, the 10-year yield ranged between 2.5–4.0% in 2010. Seems like, using your standard, the Fed had ample room to maneuver. More than it does now, for sure…

“I have a lifetime membership to Jim Rickards’ group of publications,” a reader writes, “and shorter subscriptions to True Alpha and The Rude Awakening PRO. I sometimes get directly oppositional views from these entities.

“I have bullish advice on gold from Jim and advice to buy gold producers and explorers, and another letter said it’s time to sell gold stocks. This latter advice was at some point in the last two weeks. This week, the Rude Awakening PRO touted the transports as a buy after Jim’s strategy had recommended a put on IYT a while back.

“It appears subscribing to a variety of your publications is hazardous to one’s psychological and/or financial health. What say you?”

The 5: We say what we said in late 2014, when we took up an entire episode of The 5 addressing the question.

“Dave, is it one of the signs of the Apocalypse when precious metals — the one source of real value — are tanking along with most stocks and bonds, while banks and other financials — the source of fraud and evil — keep going up?

“Or are these just the death throes of our everything bubble?

“I keep thinking about a scene in The Big Short where Steve Carell’s character exclaims that there’s a bubble and, ‘It’s time to call bull$#!+.’ When asked on what, he replies on ‘every f—-in’ thing’!

“Central bankers really have done an amazing job of keeping the music playing. But it may be time to stop dancing and grab a chair.”

“Hope you are right,” reads a more uneasy email after our gold musings in the midst of the drop yesterday. “I’m getting killed in gold with the overwhelming share of my hopeful retirement.

“Agreed, America is on wobbly legs, but it’s still the strongest compared with the rest of the world. So the dollar will still be king for five–10 years, in my opinion. No matter the money printing — the whole world is printing, and it is all relative.

“Deflation with some sector inflation is what is happening. Baby boomers are paying off debt and not spending, and no matter how much they print, we are not borrowing and spending. Hope it still pays in gold.”

The 5: None of our editors would ever advise putting “the overwhelming share” of one’s retirement funds in gold. Jim Rickards says 10% of your assets, plus a speculative portion — i.e., money you feel you can afford to lose — in junior mining stocks like the ones recommended in RickardsGold Speculator.

Also, how often are you looking at your holdings on your brokerage’s website? Are you “getting killed” because you bought a large portion of your holdings within the last three months… or are those holdings still actually in the green because you bought them earlier? Unless you’re using one of our short-term trading services — and we don’t offer such an animal in the precious metals realm — we strongly urge you to drop your mouse and slowly back away from the computer.

Yes, we’re in a disinflationary, if not deflationary, environment right now. But ultralow — and in some places negative — interest rates aren’t going away anytime soon. Even if the Fed raises again in December, the fed funds rate will still be lower than the “record low” 1% levels under the Greenspan Fed in 2003–04. In a world of next to no yield, gold continues to look attractive as a store of value…

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. After yesterday’s smackdown, the junior gold miners in Rickards’ Gold Speculator are more attractively priced than ever. And to make it worth your while, Jim is doubling down on the “free gold” offer he’s extended this year.

But all good things must come to an end, including this offer. It expires tomorrow night at midnight. If you want to claim your share of the bounty, time is running out.


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