Don’t keep your powder dry!

Friday, 19 July 2019
Adelaide, Australia
By Bernd Struben

  • What could possibly go wrong?
  • How to play gold’s resurgence

Investors’ interest rate obsession continues apace.

A few examples from this morning’s mainstream financial media.

This one from The Age:

Australian shares closed lower yesterday after a flat unemployment figure reduced the likelihood of the Reserve Bank of Australia cutting rates in the short term.’

Doggone unexpectedly decent jobs figures!

The RBA meets again in just over two weeks, on Tuesday, 6 August. The central bank lopped 0.25% off the cash rate in May and again in June. The two consecutive cuts bring the official interest rate to a new record low 1.0%.

Hoping for a third cut in as many months is a bit greedy. Not to mention unlikely. Though RBA governor Philip Lowe has left the door open for more cuts later this year.

Not to worry, though. If the RBA doesn’t come through short term, the US Federal Reserve should.

From the Australian Financial Review:

Australian shares are poised to open higher, as rising bets of a big US rate cut this month bolstered Wall Street equity bulls.’

The Fed meets next Wednesday, 31 July to decide whether to cut interest rates. Traders have priced in a ‘100% expectation’ that the Fed will do so. This would be the first rate cut since December 2008 from the world’s most watched central bank.

Odds are also up that the Fed will cut by 0.50% rather than 0.25%.

More, after a look at the markets…


Overnight, the Dow Jones Industrial Average closed up 3.12 points, or 0.01%.

The S&P 500 closed up 10.69 points, or 0.36%.

In Europe the Euro Stoxx 50 index finished down 18.75 points, or 0.54%. Meanwhile, the FTSE 100 lost 0.56%, and Germany’s DAX closed down 113.18 points, or 0.92%.

In Asian markets Japan’s Nikkei 225 is up 410.09 points, or 1.95%. China’s CSI 300 is up 1.29%.

In Australia, the S&P/ASX 200 is up 49.99 points, or 0.75%.

West Texas Intermediate crude oil is US$55.80 per barrel. Brent crude is US$61.93 per barrel. That’s another 1.3% overnight fall for WTI with Brent down another 2.5%. And this after Iran fessed up to commandeering a small foreign oil tanker it had earlier claimed it was ‘assisting’.

But traders shrugged off the spectre of a hot war in the oil rich region. Instead they focussed on slack demand in the US, the world’s biggest consumer of all things oil. From Bloomberg:

American gasoline and distillates inventories rose by a combined 9.25 million barrels last week, according to government data, well above expectations of analysts surveyed by Bloomberg.

Slumping demand is part of the picture here. But as I’ve written before…more than once…the bigger part is all about supply. Namely the game changing shale oil revolution in the US. This has seen the US produce record levels of crude this year, with production forecast to keep increasing through at least 2022.

If not for the extra millions of barrels per day coming out of the US Permian Basin, there would be plenty of demand to see crude trading higher. And if not for gravity we could all be star basketball players.

Turning to gold, the yellow metal is trading for US$1,443.54 (AU$2,042.36) per troy ounce. Silver is US$16.33 (AU$23.10) per troy ounce. (More on gold below…)

One bitcoin is worth US$10,661.04. That’s up 10.1% since this time yesterday. Most of that gain came in the blink of an eye. Bitcoin’s price rocketed US$1,000 within 30 minutes overnight our time. Is this the beginning of a new run higher? Click here for the latest crypto investing advice.

In the world of fiat currencies, the Aussie dollar is worth 70.68 US cents.

What could possibly go wrong?

So, why the rising bets on a big US rate cut?

Back to the AFR:

Equity bulls heard exactly what they wanted from New York Fed boss John Williams — the central bank should take bold, pre-emptive rate action as needed: “don’t keep your powder dry”.

“When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress,” Mr Williams said.

In a speech titled “Living life near the ZLB”, or zero lower bound, Mr Williams argued that it would be prudent for the central bank “to take preventative measures than to wait for disaster to unfold”.

You’ve probably heard the expression ‘keep your powder dry’ before. It dates back to when you needed to load your musket with gunpowder and wadding and a cap. Ram it all into place and you get one shot. Maybe to fend off an angry grizzly. Or a hatchet wielding neighbour. That is unless your powder got wet. In which case your musket was little more use than an awkward club.

In short, the expression means you should be careful and make sure you’ve got some reliable ‘firepower’ on hand when the time comes that you really need it.

But apparently that’s no longer a constraint for central bankers. Desperate zero lower bound times and all…

So don’t keep your powder dry.

Go all in.

Smoke ‘em if you got ‘em.

What could possibly go wrong?

Well…a lot really.

Putting your faith — and your funds — in the hands of the world’s central bankers is a risky gamble. And like all gambling ventures, if you stay at the table long enough you’ll eventually get burnt.

Though the house has been paying out handsomely so far in 2019. And all you needed to invest in is a simple index tracking ETF. For example:

In the US the S&P 500 is up 18.9% year-to-date.

In Australia the ASX 200 is up 19.6%.

In Europe the Euro Stoxx 50 is up 16.7%.

And China’s CSI 300 is up 28.1%.

Obviously these types of gains can’t continue indefinitely.

Eventually even the ‘use your powder now rather than bothering to keep some dry’ central bankers won’t be able to inflate the market any further…or even keep it afloat. When investors realise their dependable lifeline is little more than a rotten rope the stampede for the exits will be epic.

In the meantime, staying with the metaphors, make hay while the sun shines. And position yourself in assets that will be less likely to implode when the era of easy money and mountainous debt comes to a crashing halt.

Assets like gold…

How to play gold’s resurgence

As you saw in the markets’ section above, gold added another US$18.22 per ounce overnight. Or a gain of 1.3%.

Now have a look at the two month price chart (in US dollars) below:

chart image
Click to enlarge

Two months ago, on 20 May, gold was trading for US$1277.82 per ounce. Today it’s trading at US$1,443.54. That’s a gain of 11.3%.

Now as we’ve covered here before, when gold gains in price, well positioned gold miners tend to see their share prices go up by a far larger percentage.

Let’s test that theory again.

We’ll start with Newcrest Mining Limited [ASX:NCM], Australia’s largest gold miner with a market cap of $25.5 billion. A quick check of the charts shows Newcrest shares are up 23.7% since 20 May. More than double bullion’s gains.

Next up Northern Star Resources Ltd [ASX:NST]. With a market cap of $8.6 billion, Northern Star is Australia’s fifth largest gold miner. And its stock is up 43.4% since 20 May.

For a final example we track down the list to Gold Road Resources Ltd [ASX:GOR], 10th in terms of market cap ($1.23 billion). And Gold Roads share price is…drum roll please…up 38.6% in the last two months.

That gives you an idea of just how well gold stocks can do when the price of gold is rising. However, as Greg Canavan points out, a lot of these gains have yet to be realised by the junior miners.

But that’s not a situation he expects to continue. Especially not when the mainstream cottons onto the supply crunch Greg foresees impacting global gold markets.

Greg’s convinced the biggest gains in the months ahead lie with the junior gold miners. Though, of course, far from all of them. Junior miners are high risk stocks.

That’s why he narrowed his focus to four small ASX listed miners that survived his gruelling analysis.

Regular readers will know Greg released his report, ‘Four Potential Gold Screamers to Buy Now’, at the start of July. But only subscribers to his investment service Crisis & Opportunity — and our Alliance partners — know the results of those four tips so far.

Let me share that with you.

First, I showed you this on Tuesday this week. They’re the gains for Greg’s four new gold recommendations, as at Wednesday, 10 July:

chart image
Source: Crisis & Opportunity
Click to enlarge

Now look at this. These are the gains for the same four small gold stocks one week later, from this Wednesday, 17 July:

chart image
Source: Crisis & Opportunity
Click to enlarge

In just one week the average gain — if you’d put the same amount of money into all four stocks — went from 12.6% to 19.5%.

Greg’s top new tip is already up 30.43% in only three weeks. The worst is up 9.52%.

You’ll also note that all four recommendations remain an active buy.

Find out why here.

That’s all the time we have today.

Enjoy the weekend.