Why I’m Turning Bullish on Gold

Monday, 16 April 2018
Melbourne, Australia
By Jason Stevenson

  • A gold bull’s lurking in the shadows
  • Winding back the clock…

Jason Stevenson here — Port Phillip Publishing’s resources analyst. I used to write Resource Speculator until it closed in November. Now I steer the ship at Gold & Commodities Stock Trader.

A number of readers have found that strange. See, I have a reputation for being a gold bear at Port Phillip Publishing.

For years, I warned that gold could crash to US$931 per ounce before the next bull market starts. So, as many readers pointed out, why would a gold bear run a gold tipping newsletter?

Indeed, it was quite a controversial view.

But while there were plenty of reasons for being bearish since 2012, and even more for analysing the best junior gold stocks on the market, the facts have now changed. It’s no longer appropriate to be bearish on gold.

I am now a gold bull.

There are many reasons why you should be bullish, outlined to Gold & Commodity Stock Trader readers last week. You will read that analysis today. Now is the time to start preparing for the next gold bull market — before it starts. 

I’ll explain more after the markets…

Markets

The Dow Jones Industrial Average surged closed on Friday 122.91 points lower, or 0.51% lower.

The S&P 500 closed down 7.69 points, or 0.29% down.

In Europe, the Euro Stoxx 50 index closed up 4.03 points, netting a 0.12% gain. Meanwhile, the FTSE 100 rose 0.086%, and Germany’s DAX index rose 0.22%.

In Asian markets, Japan’s Nikkei 225 is up 48.14 points, or 0.22%. China’s CSI 300 is down 1.85%.

In Australia, the S&P/ASX 200 is up 8.90 at time of writing, or 0.15%.

On the commodities market, West Texas Intermediate crude oil is US$66.79 per barrel. Brent crude is US$71.83 per barrel.

Gold is trading for US$ 1,346.30 (AU$1,733.58) per troy ounce. Silver is US$16.72 (AU$21.53) per troy ounce.

The Aussie dollar is worth US$0.78 cents.

Bitcoin is US$8,038.99.

A gold bull’s lurking in the shadows

Let’s kick things off with a question from Ben:

Are you now not expecting gold price to drop to below $1000, before this significant breaking upwards of gold price?

I ask because last year you were firmly forecasting gold price will go down below $1000 before its next bull run.

Thanks for clarification and may be the reasoning behind the changing forecasting.

Ben, thank you for your question. It’s always good to clarify my thoughts. Gold could still break the US$1,000 zone. But it probably won’t happen for a number of years — at least not until the midst of the next sovereign debt crisis. Historically speaking, gold tends to crash during financial crises and rally into them. That’s why traders ‘buy the rumour and sell the news’.

It should be no different next time.

Based on history, as argued on 22 February in Gold & Commodities Stock Trader — an update worth re-reading — gold could rally to new highs before the next sovereign debt crisis. The government bond crisis could be years away, though. That’s why gold could rally sharply higher in the years ahead.

The yellow metal looks exceptionally strong today.

A trade war is developing between the US and China. But it’s mostly ‘hot air’ at the moment. USA Today wrote on 4 April:

The latest trade skirmish between the U.S. and China would barely nick the American economy — even if the two countries carried out their threats.

Many experts believe the threats are negotiating ploys and the two countries are likely to settle the feud in coming weeks, or at least scale back the tariffs.

If they don’t, the U.S. tariffs likely would be partly absorbed by American companies, narrowing their profits, and partly passed through to consumers, says Kathy Bostjancic, head of U.S. macro investor services for Oxford Economics.

The tariffs probably won’t impact world trade that much. China is too competitive, and the industries targeted in the US are small. That’s why US President Donald Trump’s tweets are all noise.

The market also expects a trade deal between China and the US.

Trump wants a deal.

Chinese President Xi Jinping wants one as well.

A deal seems certain at some stage. But it probably won’t happen soon. That’s good news for gold in the short term. In the medium term, aggressive central bank policy should send gold prices higher.

Central banks kept interest rates at record lows for over a decade. They also printed money to support the sovereign debt market. The combination kept the global financial system on life support during this time — central banks became the buyer of last resort.

Winding back the clock…

Remember, the US Federal Reserve saved America during the Global Financial Crisis of 2008/09. Gold rallied, when former Chairman Ben Bernanke announced his money printing policy in late 2008.

Ben Bernanke saved the US from a major depression in 2008.

The US stock market bottomed 6,469 points in March, 2009 — a few days before the G20 provided a US$5 trillion stimulus package on 2 April.

Still, the cracks widened across the global financial system.

Greece started experiencing issues in late 2009 — its sovereign debt was downgraded to junk (worthless) on 27 April, 2010. That’s why gold rallied out of the Global Financial Crisis into 2012, when Europe was on the verge of another sovereign debt crisis. Portugal, Italy, Greece and Spain — dubbed the PIGs — looked like defaulting on their national debts.

But it didn’t happen.

European Central Bank Chairman Mario Draghi saved the day. Draghi said he would do ‘whatever it takes’ to save the euro on 26 July 2012. He printed trillions of euros to support the European sovereign bond market.

Gold crashed for three years following his announcement: 



chart image

Source: tradingview.com
Click to enlarge

The yellow metal bottomed in mid-December 2015 — two days before the US Federal Reserve raised interest rates for the first time in nearly a decade.

I was bearish from 2012 and stayed bearish throughout 2016.

Remember, when it raised rates for the first time in December, the US Fed said it would raise rates four times in 2016. But that changed, when the US stock market experienced a sharp correction in January. The Fed back flipped on its aggressive policy and, alongside Brexit in June, gold rocketed to the US$1,377 per ounce major resistance level.

British politicians ignored the vote and kicked the can down the road. So with risk off the table, gold plummeted into December 2016. That’s when the Fed raised interest rates for the second time.

The yellow metal rallied straight out of the Fed meeting and stayed elevated with geopolitical threats across the Middle East and North Korea last year. It surged when the Fed raised interest rates for the sixth time in December. It raised rates three times last year.

Gold stayed above the US$1,300 per ounce major resistance level — shown by the bottom pink line on the chart below — all year:



chart image

Source: tradingview.com
Click to enlarge

It’s time to wake up and smell the roses. Everything has changed. Central banks are becoming more aggressive with their monetary policies.

Gold is rallying.

Staying bearish for the sake of being stubborn isn’t what I’m about. I’m turning bullish because it’s time.

The US Federal Reserve is withdrawing from its money printing program, allowing its bonds to mature from its balance sheet. It also wants to raise interest rates another three times this year. In other words, as interest rates move higher in the US, debts should skyrocket around the globe.

Higher interest rates should put more pressure on the global financial system in the years ahead.

That’s good news for gold.

Reuters wrote on 25 January:

The amount of dollar-denominated debt from countries and companies outside the United States has hit a record $11 trillion, new data from the Bank for International Settlements showed on Thursday.

The figures from the BIS, known as the central bank to the world’s central banks, showed the $11 trillion amount had been reached following a 5.2 percent rise year-on-year.

Thanks to a decade-plus of ultra-low interest rates, global debt now stands at US$237 trillion according to the Institute of International Finance. Take a look at the chart below:



chart image

Source: IIF
Click to enlarge

Emerging market debt stands at 210% of Gross Domestic Product (GDP). Most of that debt is written in local currencies, with about US$8.3 trillion recorded in US dollars.

That’s an issue…

Emerging economies aren’t exactly booming.

So as interest rates skyrocket in the US, another emerging market crisis — similar to the late 1990’s — could erupt. I suspect an emerging market crisis could happen, sooner rather than later.

That’s not good for much either, other than gold…

I wrote about the European Central Bank on 29 March in Gold & Commodities Stock Trader, and explained why it could phase out its money printing program in September. That would signal an end to the low interest rate era in Europe, causing significant uncertainty about the future of the financial system.

Indeed, as the ECB backs away from its conservative monetary stance, gold could explode higher. That’s why gold could break out later this year into a bull market state. European Central Bank President Mario Draghi realises that a sovereign debt crisis is brewing, and he wants to raise interest rates to support bond markets. 

Reuters reported the latest on Tuesday:

The European Central Bank could raise its deposit rate first before moving its main interest rate later, policymaker Ewald Nowotny said on Tuesday, sending the euro higher and drawing an unusual rebuttal from the ECB.

Nowotny told Reuters in an interview that the ECB’s 2.55 trillion euro ($3.1 trillion) bond-buying program would be wound down by the end of this year, which would then pave the way for the first rate rise since a fumbled move in 2011.

The European Central Bank’s deposit rate has been in the negative since mid-2014. That could change later this year, propelling gold to higher highs.

Europe is on the verge of a major financial crisis that could tear apart the world economy. Despite the official numbers, much of the continent has been in a depression since 2012. It hasn’t recovered from its previous pending sovereign debt crisis. Mario Draghi merely kicked it down the road and bought all the debt.

He saved the bond markets — and governments — at the expense of the people.

Politicians — no matter where they are located — don’t care about us commoners. They have destroyed free speech, raised taxes and increased regulation. Europe’s political elite are some of the worst, mind you. Aside from destroying their economies, they have promoted a refugee crisis, which is leading to a religious war.

I’m not surprised there’s a growing movement towards anti-establishment parties across Europe. I argued why Northern League and Five Star Movement could form the next Italian government on 8 March in Gold & Commodities Stock Trader. If that happens, contrary to most mainstream views, I believe Italy will hold a referendum to leave the Eurozone this year.

If Italy votes to leave, which looks likely given the election results (over 50% of people voted for anti-establishment parties), we could see gold finally break out into a bull market state later in the year. Remember, when Britain voted to leave the European Union, gold shot up US$100 per ounce in a day.

The proverbial ducks are lining up for gold.

Don’t forget the prospect of a major war breaking out in the Middle East and the witch hunt against Donald Trump.

Both of these stories could send gold prices sharply higher this year.

The next gold bull market seems imminent.

Technically speaking, as argued on 22 March in Gold & Commodities Stock Trader, we want to see new highs on a monthly close above last year’s high of US$1,377 per ounce — the major resistance level — to confirm a bull market.

It hasn’t happened yet.

But, if my analysis is correct, it could happen sometime in the second half of this year.

I believe it’s time to buy the best gold juniors and I will keep tipping some of the best undervalued juniors in the months ahead. If history repeats, when the gold bull market finally starts, these dark days should become a distant memory. ‘Penny gold’ stocks have hardly reacted to the gold price so far.

But that will change when gold starts to explode higher.

I believe there will be some incredible winners over the next few months and years in Gold & Commodities Stock Trader. That’s why you shouldn’t wait a second longer. Go out and buy the best gold juniors on the ASX now.

You can find my favourite stocks in Gold & Commodities Stock Trader, here. I have some massive updates coming out for readers over the next few weeks — starting this week. There are some big changing coming which could prove incredibly profitable for years.

Don’t miss out!

Find out more, here.

Cheers,

Jason Stevenson,
Resources Analyst, Gold & Commodities Stock Trader