It is 8 months since we penned part 3 of this post when The Gold Bugs Index (HUI) stood at 135. Since then things have improved for the precious metal sector and the HUI had risen to a peak of 180. Alas, since then some of the euphoria has dissipated as profits were too good to resist for some investors and so they capitalized on their gains and disposed of their holdings.
The HUI Chart
This chart shows the rally from September 2018 to February 2019 where it peaked at 180, however, it struggled to hold its ground and fell back to 160. The technical indicators show the stochastics on the floor, but, the RSI and the MACD still have room to go lower in the near term. The effect of the golden crossover has now waned so it may be better to wait and let this correction run its course before making further acquisitions.
US Monetary Policy
The Federal Reserve has implemented a policy of tightening monetary policy in preparation for a recession. The recovery has been one of the longest in history lasting for 10 years and they are aware that a recession is long overdue. A series of rate hikes have been implemented in an attempt to give the Fed some wriggle room should a recession materialize. At the FOMC meeting held on 19th December 2018 the Fed voted to raise the target range for the fed funds rate to 2.25% - 2.50%. This allows them to implement a rate cut should it become necessary.
We are of the opinion that there will be no more rate hikes this year and that there is a strong possibility of a rate cut due to an economic slowdown in the US as evidenced by the Feds lowering of their economic growth projections for this year by a full percentage point to 2.1%.
There is also the possibility of the Fed re-introducing Quantitative Easing (QE) which would cause the value of US Dollar to diminish. This is likely to lead to an increase in gold prices due to the inverse relationship between gold and the US Dollar being alive and well as supported by the historical data of rate cuts being implemented after the 2008 financial crash which was followed by a period of aggressive rate cutting and a dramatic rally in gold prices from 2009 to 2011.
Taking a quick look at the chart we can see that the US Dollar has had numerous attempts at breaking resistance at the 97 level from October 2018 to April 2019 and failed. The only explanation we can offer as to why it hasn't fallen further at this point is due the currencies of the Japanese Yen and the Euro. The value of these two currencies have been falling, making the US Dollar look the best of a bad bunch.
(The U.S. Dollar Index is the value of the dollar relative to the value of a basket of currencies of the U.S.'s most important trading partners contextually the Euro has a weighting of approximately 58% followed by the Yen with approximately 14%.)
To some extent the Euro is affected by the on-going fiasco that is Brexit and naturally the uncertainty that surrounds it. Should a solution be found then the removal of such uncertainties is likely to result in a strengthening of the Euro. In turn, there is a significant likelihood of the US Dollar value decreasing.
This year the Japanese Yen has suffered lending support to the US Dollar. However, since 2015 the trend has been bullish, and the Yen has strengthened by around 12%. If this trend continues then a stronger Yen would also contribute significantly towards the likelihood of the US Dollar decreasing. As stated, this bodes well for an increase in the value of gold in the foreseeable future.
The competition for the precious metals sector from the main financial markets remains strong as evident by the recovery of the S&P500 and its rise from 2350 to 2905, registering a gain of 19%, in the period from December 2018 to April 2019. This recovery by the S&P500 has also impacted on golds progress as the S&P500 looks attractive once again. Should a recession commence then some investors may look for alternatives for their investment funds and good quality gold and silver producers could become flavor of the month.
To generate profits in precious metals mining sector one has to be highly selective and invest in the best of these stocks that are making money now and have a low cost of production. We cannot rely on gold rising to $2000/Oz in a hurry no matter how much we believe it to be undervalued at the moment. Gold will have its day in the sun, but for now we need to expect a fair amount of volatility across the board, so stay with good quality precious metals stocks and be patient. When the bull market for this sector finally gains some traction gold, silver and their associated stocks will become increasingly more valuable, so we do need to remain vigilant and aware of this ever changing financial and political environment.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.