September surprise?

  • Will the Fed raise rates this month?
  • Market update
  • Spot gold underperforms…but gold stocks hold up
  • The last great entry point

Will the Fed raise rates this month?

The Federal Reserve Bank start their September Federal Open Markets Committee meeting tonight.

After the underwhelming Jackson Hole conference, will the Fed risk it and raise the US cash rate this month?

Reuters argue, that a ‘September Surprise’ shouldn’t be ruled out:

Market volatility is low, US census data shows income gains have reached the middle class, and workers are clawing back a larger share of national income. For now, at least, no international risk stands out and inflation may even be picking up.

If Fed Chair Janet Yellen wants to prove that policymakers are not being pulled along by investors who for years have second-guessed them, this week may offer a rare moment of calm to do so.

Before we get into this, let’s look at the market data…


Overnight, the Dow Jones Industrial Average lost 3.63 points, or 0.02%%.

The S&P 500 dropped 0.04 points to 2,139.12

In Europe, the Euro Stoxx 50 index was up 33.06 points, ending the day 1.13% higher. Meanwhile, the FTSE 100 was higher by 103.27 points, or 1.54%. It’s similar story with Germany’s DAX index, up 97 points, a total gain of 0.95%.

At time of writing, Japan’s Nikkei 225 index is a tiny 0.09%, or 15.44 points. China’s CSI 300 index is down 3 points, sitting on a 0.09% loss for the day so far.

Back home, the S&P/ASX 200 is down again, trading 11 points lower two hours from the market close.

On the commodities markets, West Texas Intermediate crude oil is trading for US$43.30 per barrel. Brent crude is US$43.08 per barrel.

Gold is US$1,315 (AU$1,744.60) per troy ounce. Silver is US$19.23 (AU$25.50) per troy ounce.

The Aussie dollar is marginally higher than this time yesterday at 75.42 US cents.

Spot gold underperforms…but gold stocks hold up

If you’re a long-time subscriber of Jim Rickards, you’ll know he’s said there’s very little chance of a rate hike from the Fed after March this year. After that month, Jim says that it’s too close to the presidential election. Furthermore, the US economy is weakening, not picking up the so-called strength the Fed would have you believe in.

Reuters may believe now is the time to hike rates — even if it’s just to save their credibility — but it’s not going to happen. 

Since the Jackson Hole conference, the Fed Watch Tool has dropped the probability of a rate increase for September down to 15%.

With a Federal Reserve rate hike off the table, there’s been very little to push the gold price higher. And that’s in spite of the Dow Jones Industrial Average falling 390 for September to date.

It’s been an ordinary September for the sport price of gold.

One month spot gold price chart – US dollars

chart image

Click to enlarge

Right now, gold is trading at US$1,315. Which is only US$3 per ounce higher than what it was at the start of the month. The short lived rally to US$1,350 10 days ago gave the gold bugs hope…but without a rate hike on the table from the Federal Reserve, the price fell.

As Jim explained in yesterday’s Port Phillip Insider, gold is on the march to higher prices in the long term. However, don’t expect the shiny metal to move up in a straight line.

Even though the gold price has dipped this month, a note form Goldman Sachs says that gold mining stocks are about to hit the ‘sweet spot’. They told the market, ‘We accept gold stocks have rallied significantly…however we believe there is still a significant leg up for these equities. Gold companies have endured the pain of repairing their balance sheets, selling/closing loss making mines and taking extra costs/capex out of the system.

While the team at Goldman are referring to US listed gold stocks, some local Aussie mining gold stocks have performed quite well this September.

Take Resolute Mining [ASX:RSG], Evolution Mining [ASX:EVN] and Beadall Resources [ASX:BDR] for example. Even though the spot gold price has gone nowhere, these companies are up 19.49%, 11.47% and 17.81% respectively.

But not all gold stocks are created equal. Australian gold mining giant Newcrest [ASX:NCM] is down 4.42%. Another well-known mid-cap gold miner, Northern Star [ASX:NST], is only up 3.95% for September.

What does this tell us?

Just because there’s shiny metal in the ground, doesn’t mean it a profitable company.

Nobody knows this better than Jim. When I asked him his thoughts on gold mining stocks in Australia, he told me:

Every single explorer, developer and producer are all very different from each other. You have got to take one company at a time on a case by case basis.

There are some excellent miners out there. And there are frauds. There are some solid proven prospects…some highly-speculative situations…and then there are situations where it’s clear investors will almost certainly lose their money.

I’ll hand you over to Jim now, and he can tell you his view on gold mining stocks himself. The way he sees, the right gold stocks are set up for a once in a decade boom.


Shae Russell


The Last Great Entry Point

I’m frequently asked, ‘Jim, what are your favourite trades?’ Well, the best ones are characterised by asymmetry.

That means I don’t know exactly what will happen (no one does), and the trade could go either way. But the risks of the trade moving against me are small compared with the risks of the trade moving in my favour. That’s an asymmetric condition.

Right now gold looks like an asymmetric trade. Of course, it can go down, but taking all factors into account, it has much greater odds of going up.

Here’s why: In general, gold goes up in inflation and down in deflation. In extreme deflation, gold actually goes up a lot because central banks use it to devalue currencies and force inflation, but we’re not there yet — let’s just stick to moderate deflation.

The odds of inflation versus deflation are asymmetric in favour of inflation. This has nothing to do with markets. In general, the ‘natural’ deflationary forces are probably greater. But central banks don’t care about markets. They care about propping up banks and government finance. That requires inflation to erode the real value of debt.

When the real value of debt gets too high, borrowers default, which hurts banks. The banks actually like inflation because it makes it easier for borrowers to keep paying on time.

It’s true that we haven’t seen much inflation in recent years. That just means the central banks have to try harder. Here’s the central bank tool kit: QE, Operation Twist, forward guidance, currency wars, zero interest rate policy, negative interest rate policy, helicopter money…you get the point; the list goes on forever because central banks won’t stop trying.

Central banks are not the enemy of gold investors. In fact, they’re your best friends, because they want inflation. They’ll keep trying until they get it, and that will send gold prices higher.

Gold went down from 2011–15 because the dollar got stronger. Those days are over. The Fed miscalculated the strength of the US economy. They thought the economy was strong enough to support a strong US dollar. The idea was to allow a cheap yen, cheap yuan and cheap euro to give other economies a boost.

As usual, the Fed was wrong. Growth since 2011 has been under 2% — well below potential. Now the Fed is returning to a weak dollar policy. Japan and Europe will just have to fend for themselves with deficit spending and fiscal policy.

The evidence for this asymmetry is in the price of gold itself. It has had ups and downs, but has been remarkably resilient. Every time gold has traded down since late 2015, it has bounced back, found a new floor and then clawed its way higher.

It’s not quite breakout time yet, but the evidence for the upward bias is there. We may be getting close to the last great entry point before the breakout. The time to buy gold is now.

All the best,

Jim Rickards