‘Powell let us down’

Thursday, 1 August 2019
Adelaide, Australia
By Bernd Struben

  • More bad news please
  • $22 billion of Aussie gold

Well that was anticlimactic.

Investors had priced in a 100% likelihood of the US Fed cutting rates by 0.25%. And at 2pm EDT yesterday the Fed delivered just that.

This brings the US cash rate down to 2.25%. And it marks the first rate cut by the world’s most watched central bank in almost 11 years. The last cut was delivered in December 2008, during the height of the global financial meltdown. That one took the official US rate down to 0.25%.

Yesterday’s was delivered with the US economy growing at an annual rate of 2.2%. And unemployment figures at 50 year lows. (Just saying…)

Investors in US stocks applauded the widely expected 0.25% rate cut by stampeding for the exits.

The NASDAQ, S&P 500 and Dow Jones all sold off heavily.

Have a look at the one-day chart for the Dow below:



chart image
Source: Google Finance
Click to enlarge

I’ve marked 2pm, when Fed Chairman Jerome Powell issued his proclamation. You can see US President Donald Trump wasn’t alone in his disappointment.

In the final two hours of trading the Dow lost 1.29%. That’s what happens when a small rate cut is viewed as a certainty while investors are not so secretly hoping for a larger reduction.

In what should have been further positive news for the markets, the Fed also confirmed it was halting its quantitative tightening policies two month earlier than planned. Meaning, the central bank will hold onto its US$3.8 trillion asset portfolio.

And the bank left the door open for additional cuts…if needed.

The official Fed statement noted it ‘will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion’.

But that bit of ‘good’ news was overshadowed when Powell threw cold water on hopes this would be the first of many rate cuts ahead. In a statement following the official announcement, Powell called yesterday’s rate cut a ‘midcycle adjustment to policy’.

He continued:

What I said was it’s not the beginning of a long series of rate cuts… When you think about rate-cutting cycles, they go on for a long time and the committee’s not seeing that… You would do that if you saw real economic weakness and you thought that the federal funds rate needed to be cut a lot. That’s not what we’re seeing.’

Good heavens!

The banker-in-chief says he’s not seeing any real economic weakness in the world’s largest economy. In our brave new world, where bad news is good news for equites, you can see why investors panicked.

But I think they overreacted. Trump, after all, has their back.

Here are the tweets he sent out shortly after the Fed’s announcement:



chart image
Source: Twitter
Click to enlarge



chart image
Source: Twitter
Click to enlarge

But he wasn’t done yet. Having had three hours to think about it, here’s what Trump tweeted an hour ago (at time of writing):



chart image
Source: Twitter
Click to enlarge

Pity poor Powell.

He so wants to be seen as acting independently. But when he does move to cut rates again — and he almost certainly will this year — it’s no secret who’ll be working his strings.

Trump will pull out all the stops to ensure the stock markets are humming along and the economy appears sound in the leadup to the November 2020 presidential elections. And when Trump huffs and puffs hard enough, Powell will bend with the wind.

Now a look at those manipulated markets…

Markets

Overnight, the Dow Jones Industrial Average closed down 333.75 points, or 1.23%.

The S&P 500 closed down 32.80 points, or 1.09%.

In Europe the Euro Stoxx 50 index finished up 4.00 points, or 0.12%. Meanwhile, the FTSE 100 fell 0.78%, and Germany’s DAX closed up 41.80 points, or 0.34%.

In Asian markets Japan’s Nikkei 225 is down 22.82 points, or 0.11%. China’s CSI 300 is down 0.82%.

In Australia, the S&P/ASX 200 is down 19.16 points, or 0.28%.

West Texas Intermediate crude oil is US$57.53 per barrel. Brent crude is US$65.17 per barrel.

Turning to gold, the yellow metal is trading for US$1,410.46 (AU$2,063.59) per troy ounce. Silver is US$16.20 (AU$23.70) per troy ounce.

One bitcoin is worth US$9.989.57.

The Aussie dollar is worth 68.35 US cents.

More bad news please

Stocks weren’t the only thing to sell off on Powell’s disappointing assessment of a sound US economy.

Gold also fell overnight. It’s down 1.4% since I wrote to you yesterday.

Three factors have been widely touted as supporting gold’s recent bull run. A run that saw it reach record highs in Aussie dollar terms.

The march to ever lower interest rates by the world’s biggest central banks is one. If the US Fed does hold rates steady from here — unlikely — that increases the odds other central banks will follow suit. Or at least cut rates less aggressively. This looks to have been weighing on investors’ minds yesterday as gold sold off.

The second thing that’s helping gold run higher is that central banks themselves have been ramping up their bullion purchases, led by China and Russia. Regardless of where rates go, that’s likely to remain the case.

Finally, gold’s safe haven status has offered a healthy tailwind in this year of trade wars, Brexit, and simmering unease over potential conflicts around the world. That widespread geopolitical unease doesn’t look to be going away anytime soon.

But there’s more to the gold picture than the mainstream media is reporting on.

As Greg Canavan’s research into the sector recently unearthed, global gold markets could be facing a historic supply shock just over the horizon. When the reality sets in and the financial media begins reporting on this, Greg expects gold could top US$2,000 per ounce in short order.

And he’s lined up four junior Aussie gold stocks that are in a great position to benefit when it does. Even at today’s US$1,410 per ounce, the four stocks Greg recommended at the beginning of July are all in the black. If you’d invested the same amount in each stock, you’d be sitting on an average gain of 21.4% today.

Yet all four junior gold stocks remain an active buy. That’s because Greg is expecting more — a lot more — from them over the next few months.

You can get the full scoop from Greg himself, right here.

$22 billion of Aussie gold

Even at today’s prices, many Aussie gold miners are making hay.

And don’t get me wrong. Gold may have slipped overnight. But today’s price of AU$2,063.59 per ounce is less than $18 per ounce off the record Aussie dollar gold price of $2,081.

This is seeing many in the industry return to old gold mines. With improved techniques and a far higher gold price, the gold that was left behind because it previously was uneconomic to get to it is now being actively targeted.

The renewed push is expected to see Australia produce a record amount of gold next year.

From the AFR:

Gold bars are being poured in the town [of Stawell] for the first time in three years as exploration success, a different approach to mining and the highest Australian-denominated gold price in history revive interest in the town’s eponymous mine.

Private equity firm Arete Capital took a punt that it could profitably revive the Stawell mine when gold was fetching about $1600 per ounce…

From Orange in New South Wales to Bendigo in Victoria and Kalgoorlie in Western Australia, the gold sector is forecast to pull a record $22 billion worth of yellow metal out of the ground in fiscal 2020.’

$22 billion. And that’s estimated on today’s prices, mind you.

If the gold price rockets as Greg forecasts, that number could easily top $31 billion. Which will make select gold miners — and their shareholders — very happy indeed.

To access Greg’s report on ‘peak gold’, click here.

Cheers,
Bernd