Want To See Gold Go Higher? It Needs Some Bad News

Of course, gold loves inflation. The more prices jump the more currencies drop.

Currency buys goods. Greater inflation means you need more money to buy things. The money you hold in inflationary times is worth less because you need more of it to buy things. To protect the value of a dropping currency during times of high inflation, investors put their money into commodities like gold that move up as currency values fall.

Given the mass central bank money printing over the last decade, many—including us—thought there would come a day where inflation would start getting out of hand. That has yet to happen.

US inflation, in fact, has gone the other way. It's gotten weaker.

Eurozone inflation has also slowed while Japan’s inflation rates are already weak.

The lack of inflation risk hasn’t helped gold. The slowdown of inflation in the US has now helped cause gold to risk breaking a technical uptrend.

Typically, gold has an offset when inflation slows. Central banks will usually back off raising rates.

The US Fed, however, is not backing down. Just the opposite in fact. The Fed is getting more hawkish despite the slower inflation numbers.

The more the US Fed is adamant about raising rates, the greater the likelihood that inflation continues to slow. That, of course, is negative for gold.

The day of the last CPI report (which was a weak .1% month-to-month) the Fed raised rates anyway. They also confirmed that they will taper bond purchases later this year which also helps interest rates move higher.

Both moves (the rate hike and taper) stamp out inflation.

NY Fed President William Dudley said Monday , the Fed hasn’t even done much yet. “Essentially what’s happened is we haven’t actually tightened financial conditions.”

The Fed has one more rate hike expected this year and a major tapering to lower their $4T+ bond and mortgage portfolio. They feel they haven’t even done anything yet.

Get The App

Join the millions of people who stay on top of global financial markets with Investing.com.

Download Now

That should help rates move higher, which can further stamp out inflation and hurt gold.

We pointed out last Thursday that we thought the dollar could start to bottom based on great action. That was despite rumors of further investigations of President Donald Trump, which means investors are worrying less.

We’ve been pointing out on just about every dip brought on by rumors though, that James Comey had already confirmed there was no investigation of the President. Markets are becoming less worried about the possibility of impeachment.

A serene Washington DC environment is not gold’s friend. Gold loves volatility. If investigators can’t pin anything on the President or his inner circle, investors have fewer worries and less reason to hold safe-havens like gold.

This section is for all you gold bugs out there.

The debt ceiling is coming. Most of Congress are saying so far they haven’t even started talking about the debt ceiling. Treasury Secretary Steven Mnuchin keeps pushing it out. Currently the due date isn’t until September. The markets have some time to worry, but this worry is a biggie.

If the debt ceiling is not raised then the US is at risk of not paying its debts, which will very likely trigger a catastrophe of confidence and a stock market crash. Interest rates would spike. The US debt would be downgraded.

With that all said, we think the government is going to solve this problem too. We’d expect President Trump to be able to rally Democrats to vote for a “clean raise” along with less-conservative Republicans. If you add it up, he probably has enough votes to get that “clean raise” which would avoid any arduous negotiations.

If we get a clean raise, we’re in the clear. But of course, gold won’t like that too much.

In the meantime gold is sitting at a critical juncture. Even fears of the debt ceiling likely won’t help gold in the near term.

Conclusion

Gold needs some bad news but all it’s getting is bad gold news. Low inflation, higher rates, and smooth sailing in DC are causing gold near-term risk.

Disclosure: Securities reported by Elazar Advisors, LLC are guided by our daily, weekly and monthly methodologies. We have a daily overlay which changes more frequently which is reported to our premium members and could differ from the above report.

Portions of this report may have been issued in advance to subscribers or clients. All investments have many risks and can lose principal in the short and long term. This article is for information purposes only. By reading this you agree, understand and accept that you take upon yourself all responsibility for all of your investment decisions and to do your own work and hold Elazar Advisors, LLC and their related parties harmless. Any trading strategy can lose money and any investor should understand the risks.

Written By: Investing.com