On the 2nd of July 2019, we posted Part One of this article with the following summary points:
After six years in the doldrums gold has suddenly come to life, however the two main influences on it are the U.S. dollar and the S&P 500.
Gold has an inverse relationship with the U.S. dollar and tends to move in the opposite direction to it.
We're all aware that bull markets do not go on forever, and this bull phase is now 10 years old and overdue for a correction.
Since then, gold prices have moved up from $1,389/Oz to $1,527/Oz despite the US dollar remaining relatively strong. However, the S&P 500 is starting to splutter as the long-awaited correction begins, and investment funds look for a new home.
The U.S. Dollar
At this point, we must reiterate that, as gold bugs, our attention remains focused on the world's central bankers as they have now entered a phase of financial stimuli. This exercise starts with a series of interest rate cuts and will be followed by some form of Quantitative Easing, which is yet to be announced. The introduction of interest rate cuts has boosted the price of both gold and silver. The first rate cut in the US has not harmed the US dollar yet as it has managed to hold above the all-important 97 level as the chart below shows. Its current strength could be attributed to the demise of other currencies such as the Euro and the British Pound, and therefore, the best-looking horse in the glue factory is the US dollar.
The markets have an expectation of another rate cut at the September 17/18th FOMC meeting, which we suspect will be followed by another cut before the end of the year. These cuts will be body blows for the US dollar, and sooner or later, it will break to a much lower level.
This week, we have seen a yield-curve inversion whereby the difference between the 2-year and 10-year Treasury's has fallen below zero. This is a red alert for some analysts as a yield-curve inversion has preceded many of the previous recessions, suggesting that another recession could be unfolding right now.
Finally, we have the pressure being exerted by the president who has made it public knowledge that he wants lower rates in order to support exporters of American goods and services.
All in all, we are anticipating at least two more rate cuts, and some may be more than the usual 25 basis points, which doesn't bode well for the US dollar.
A quick look at the chart of the US dollar shows the technical indicators are more or less in neutral position at the moment. Also, note the number of times it moves above and below the all-important 97 level, which acts as both support and resistance as the dollar oscillates.
The S&P 500 Falls
The SPX was long overdue a correction, which now looks to have started. The technical indicators are heading south into the oversold zone, but there is still room for it to go lower as the chart below shows.
The recent interest rate cut in the US has failed in its attempt to boost the stock market suggesting that more cuts are required to support this weary market.
Gold has recovered from the US rate cut and managed to hold onto the $1,500/Oz milestone. Gold is technically overbought and may now take a breather, but don't count on it.
In the US, there exist both low inflation and low unemployment, so the only reason for rate cuts is to boost a flagging stock market. As interest rates are already at historic lows, further cuts will do nothing for the markets, so it's a case of look-out below.
Gold and silver and their associated stocks are entering a new phase in terms of demand as the US dollar weakens, and the general stock market begins a long descent to much lower levels.
It couldn't be clearer; buy gold, silver, stocks and options depending on your level of sophistication and aversion to risk.
This will be a gut-wrenching ride with eye-watering pullbacks, so you will need all the resilience that you can muster to stay on this bull.
Always have a cushion so that you can live to fight another day, do the work and place those trades.
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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.
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