Is Gold Set To Lift Off Post Fed And Is The Fed Preparing For A Recession?

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Includes: DGL, DGLD, DGP, DGZ, DUST, DZZ, GEUR, GHE, GHS, GLD, GLDI, GLDW, GLL, GTU, GYEN, IAU, JDST, JNUG, NUGT, OUNZ, PHYS, QGLDX, SGOL, UBG, UGL, UGLD
by: Doug Eberhardt

Summary

The Fed set to raise rates .25 is a given. Could there be a surprise?

What gives anyone any confidence in the Fed or Trump's policies?

Is the Fed raising rates only to have more power to combat a recession?

Gold demand is set to increase in China and India mostly through demand for investment bars in China, signifying an important change.

Gold, silver and miner bounce coming. Be long all by next week.

The Fed is set to raise rates on Wednesday and most everyone agrees that they will raise rates by .25 basis points. Some go as far as saying the Fed may raise rates by .50 points. Why not? Everyone seems to believe in the Fed and what they do and ignore things like valuations these days. Ever since the days of CNBC commentators looking at the size of Alan Greenspan's briefcase the stock market analysts have worshiped the Fed and their monetary policy, even though we are now once again sitting on a stock market and real estate level that some say is due for a pullback. Let's looks at some details.

Credit card and auto loan delinquencies started to rise in January of 2017. Weak May jobs growth and a revision lower of both March and April's numbers should have the Fed concerned. Interestingly enough that day the stock market shot higher, but so did gold. Consumers are the story here though. Consumers make up 70% of GDP with their spending and the easy money through credit cards and loans to lesser qualified individuals may be ending soon as banks are starting to see some troubles. "Failed consumer loans also dinged banks' balance sheets. Banks charged off $11.5 billion of loans in total in the first quarter, an increase of 13.4%. Net credit card charge-offs rose 22.1%, while auto loan charge-offs increased nearly 28%." Retail stores have seen closures, layoffs and potential bankruptcies. Restaurant sales also continue to decline.

You can't have 3% growth that the Trump administration is expecting without productivity. Many look at the times since the great recession of 2008/2009 as being some of the best. But this has only been found in the pockets of those who benefited from an unprecedented stock market rise fueled by the Fed loosening of interest rates to historic lows. The stock market has reached all time highs and yet if you glance at productivity, you see that this rise is built on a pile of sand, not real growth. The stock market rise is just an illusion as productivity sits at its worst performance in 70 years but who cares when you are making money?

What about household debt? Have consumers learned anything since the last crisis? Have they reined in debt? The answer is no. And this time it's not all housing debt as non-housing debt is a higher percentage of the total debt compared to 2008/2009. "Total household indebtedness stood at $12.73 trillion as of March 31, 2017. This increase put overall household debt $50 billion above its previous peak set in the third quarter of 2008."

Consumers are not disciplined. We saw that leading up to the 2009 crisis. They spend till they can't any longer as they borrowed as much as they could from their houses, thinking that real estate doesn't ever fall. Some are at it again flipping houses and this can continue for a while as long as rates stay low, but what is the Fed doing raising rates in light of the following graph showing a downward sloping loan origination trend? Will higher rates bring in more loans? Hardly.

The 1967 song by the Grass Roots still applies today, especially when it comes to the stock market and real estate market and you listen to the Fed;

Sha la la la la la live for today
Sha la la la la la live for today
And don't worry 'bout tomorrow, hey
Sha la la la la la live for today

Where's the growth? Productivity is at multi-decade lows in nonfarm business and manufacturing sectors and this in no way justifies rate increases at this point in time.

Is the Fed raising rates only to have more power to combat a recession?

The Fed themselves pointed out that a reason to raise rates now is that "The limitation on monetary policy imposed by low trend interest rates could therefore lead to longer and deeper recessions when the economy is hit by negative shocks."

The Fed is raising rates during a slow growth economy that saw GDP rise only 1.6%. The Trump tax cuts, infrastructure spending and cuts in regulations are supposed to get us 3% growth but many economists don't see this growth potential until 2018. These economists don't see a recession coming. Of course economists and the Fed didn't see the 2009 crisis unfolding either. Neither did most financial advisors.

On a side note, the stock market will do what it does with or without data until it doesn't. Same goes for real estate although I would be a seller now, not a buyer. If you have fought the stock market by betting against it, then you have probably lost some money the last few years. But this last Friday we saw the first sign of real weakness in the dot com stocks like APPL and AMZN and this move lower as quickly as it has occurred, could be the beginning of something worse after the Fed. But I wouldn't short it just yet. The DOW was a benefactor of the dot com selling though, ending Friday higher. This same scenario happened in 2009 as well but we aren't quite ready to sell everything long the market just yet. The deflationary credit contraction I have written about isn't quite is on the horizon but at some point it will come.

Gold demand set to increase in China and India Mostly Through Investment Bars in China

It seems while we bottom out here in gold we have many reasons formulating that the next move up should have some strength behind it, not a short term pop and drop like we have seen so many times.

  1. India has set the gold tax lower than expected. The government has set the tax at 3% set to take effect on July 1st. This is less than the 5% that was expected.
  2. Gold consumption hit a 7 year low in India, the biggest buyers of gold historically, as there was a crackdown on black money that scared buyers away. Gold imports increased 20% in May and should increase even more as the tax is lower. India imports most of its gold.
  3. China, currently the world's largest consumer of gold, has seen is looking at a 50% increase in imports for 2017 as they go through some real estate, stock market and currency woes. Sales from bars for investment purposes are expected to climb 60% versus 1.4% for jewelry. Those who point to jewelry demand as a reason to own gold or not to should take note of this change in gold demand dynamics.

Gold, Silver and Miner Bounce Coming. Be Long All By Next Week

We have been off and on buying and selling (NYSEARCA:JDST) and (NYSEARCA:DUST) of late but the tide should be turning soon. I can say with a high degree of confidence that (NYSEARCA:JNUG) and (NYSEARCA:NUGT) will be the trade for the next few months possibly. It's as bullish as I've been for quite some time. Buying these two ETFs will be different this time. I want to hold onto them a little longer than normal, even dealing with the potential of some deterioration in the shares. You tell me where you can get 30% and lose a couple percent from deterioration over the next couple months outside of options and futures (which I don't trade in), and I'll buy it. It's sure not in dot com's at this point and for me that leaves the gold miners which I think traders will flock to post Fed by next week and we'll see a nice run higher. Until then I reserve the right to still trade JDST and DUST.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in JNUG, NUGT, JDST, DUS over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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