Latest from Brien Lundin
Wednesday, October 12, 2016

Stock Market To Fed:

Take A Hike

The stock market and gold have delivered an important signal over the past few days.

Dear John,

If you stay focused on the consensus point of view in today’s markets, you’ll get whiplash as that consensus flashes from one extreme to the other.
For example, gold was hit by a major sell off last week, dropping about $43 on Tuesday.
The selling was sparked by a sudden flash-crash in the pound on renewed Brexit fears, and the descent was turbo-charged by hawkish comments from Richmond Fed President Jeffrey Lacker.

Lacker’s comments, of course, were only the latest volley in a barrage of rate-hike jawboning by Fed officials in recent weeks.

Under the weight of all this, the consensus view had switched to an expectation that the Fed would get in its annual quarter-point rate hike, once again, in the nick of time at its December meeting.
So from the view that gold would thrive in a world of negative interest rates and central bank futility, the consensus view shifted to a Fed intent on pursuing a tightening policy that would sink the yellow metal.
Gold was sold off — even though the crucial September nonfarm payrolls number was due on Friday. And despite the fact that this number could change everything.
As it turns out, that jobs number was a mild disappointment: enough to send gold rallying immediately, but not bad enough to keep the metal moving higher. Gold actually fell about $14, before recovering to end Friday barely in the green.
But all in all, it was a bad week for gold. And it continued this week.
It culminated yesterday in a scenario that should have been lethal for gold: The U.S. stock market took a nose dive as earnings disappointments compounded rate hike fears, and as the dollar index soared higher on euro weakness.
Gold should have plummeted in response. Instead, it only slipped about $6, and actually spent much of the day near unchanged. And today, it’s been hovering right around unchanged again, refusing to continue its decline.
More interesting, even in the face of the massive selling in the paper gold futures markets, the major gold ETFs not only didn’t see big withdrawals, they actually experienced significant new buying.
This shows that many investors are unconvinced that the Fed will be able to hike rates in December, or that such a small rate hike will be negative for gold in any way.

The Tail Wags The Dog

Early signs of a weakening U.S. job market and economy (including not only the September payrolls report but also the Feds own Labor Market Conditions Index, which is declining and perhaps signaling an imminent recession) are one reason why the Fed may not be able to hike rates in December or anytime soon.
Another reason: The stock market won’t let it.
The entire rationale for the Fed’s zero interest rate policy and QE was to drive up asset prices (equities and residential real estate) to create a “wealth effect” that would encourage consumer spending.
It worked, at least to create asset price inflation. But in the process, it created a dependency upon the Fed’s easy-money drug.
Simply put, equities investors have become addicted to what the Fed has been pushing — easy money, and no move on rates — and are not going to allow a rate hike without a major decline in this inflated asset class.

So if the Fed hikes and stocks crash, we’ll get the precise opposite of the wealth effect: a “poverty effect,” if you will.

Right now the markets are following the script that Peter Boockvar, the widely followed economist and upcoming presenter at the 2016 New Orleans Investment Conference, has been predicting. In short, rising interest rates leading to a major correction or crash in equities, resulting in a U.S. recession and the Fed resorting to QE4…
…and soaring gold prices as a result.
In the short-term, I think gold will continue to face headwinds as the market begins to accept that the Fed will squeeze in a quarter-point rate hike at its December meeting.
But, if the intervening economic data will actually allow the Fed to accomplish that rate hike, the event will — as it did last year — serve as a launching point for gold.
I’ve made this prediction before, as you’ve read. But Peter noted essentially the same thing in a note last week, and I think he explained it in an especially compelling fashion:

“Watching the decline in gold on the belief odds are growing that the Fed is going to raise interest rates by 25 bps soon puts me back to November and December 2015 when the same behavior took place ahead of the first rate hike in almost 10 years. After that hike was digested gold then rallied 30%. For some reason one rate hike per year somehow scares gold holders even though this potential rate hike is coming as economic growth is barely above zero. Fully priced in odds for a rate hike after the next one doesn’t come in until December 2018! Let’s look at REAL yields which is the real driver of gold prices. Headline CPI since November 2015 is up by 6 tenths of a percent, thus another rate hike is just catching up to the rise in CPI.
“On the more important big picture bull case on gold, that being a bet against central bank policy essentially, the positive fundamentals keep rolling in. All we have to do is look at the back tracking that the BOJ and ECB are [clearly] doing because of the realization over the damage they have done to their respective banking systems. As for the bet against the Fed’s credibility, that seems to be coming to fruition as well. On the recent move up in the US dollar and the gold bears that brings out, the DXY is still below where it was when the Fed raised rates in December 2015.”
I look forward to hearing Peter expand on these views here in New Orleans in few weeks.

On that note, we’re getting a new flood of last-minute registrations for this year’s New Orleans Investment Conference, as people are realizing what an incredible opportunity it presents.

We’ve just secured a new block of hotel rooms which, as a bonus, are located in New Orleans’ historic French Quarter. But they’re going quickly.
So if you’d like to still save up to $400 on your registration fee…and take advantage of this remarkable opportunity in metals and mining…register for the New Orleans Conference now by CLICKING HERE.
And call us toll free at 800-648-8411 to secure one of the few remaining hotel rooms we have available.
In the meantime, hold onto your gold investments, and take advantage of any bargains that may come about.

All the best,
Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference