Graceland Updates 4am-7am
March 7, 2017
1. A week ago I talked about the "need to bleed" for gold stocks. Since then, it could be said that the blood has flowed with gusto.
2. Until the March 15 FOMC meeting is out of the way, gold and associated investments will be vulnerable against the dollar.
3. Please click here. Double-click to enlarge this GDX chart.
4. As Chinese new year celebrations waned in February, GDX began trading in a modest broadening formation. Broadening formations tend to be resolved in a somewhat violent manner.
5. In this case, the breakdown from that formation created a droopy right shoulder of an inverse head and shoulders bottom pattern. The shoulder is droopy because there is considerable market concern about the upcoming FOMC meeting next Wednesday.
6. There is good news for gold stock enthusiasts, though. To view it, please click here. Double-click to enlarge. The Fed's first rate hike created an enormous rally in gold, silver, and associated stocks.
7. That's because rate hikes incentivize banks to move money out of government bonds, and into the fractional reserve banking system, where it can be loaned out aggressively.
8. The result is a boost in money velocity and inflation. Gold stocks mount sustained rallies in that environment.
9. In late 2016, Janet Yellen suggested an aggressive pace of rate hikes in 2017 would be her play, but most analysts didn't believe her. After all, back in late 2015 she promised that there would be four rate hikes in 2016, and there was only one.
10. Gold stocks swooned in mid-2016 when it became apparent that the rate hikes needed to boost money velocity would not be happening.
11. A rate hike next week should quickly produce "Rate Hike Rally #3" for gold stocks. Also, I should note that the inverse H&S bottom pattern for GDX could become a double bottom pattern.
12. Double bottom patterns create substantial fear amongst investors, more so than any other technical market pattern. For a double bottom pattern to be valid, volume needs to be less on the second bottom, and so far that's the case with GDX.
13. Tactics? I covered off some GDX short positions in the $23 area, and have started buying GDX in small size. Until the FOMC meeting is done, I'll use my unique pyramid generator to systematically buy any further price weakness in GDX.
14. Please click here. Double-click to enlarge. Gold bullion has not fallen much since arriving at my last selling area of $1265.
15. It appears that gold will make a low somewhere between $1220 and $1200 by the FOMC meeting, and a rally will begin from there.
16. It's important to buy gold stocks and silver stocks around support zones for gold bullion. The buy size should reflect the size of the support. The $1220 and $1200 support zones are modest in size, so buy size should also be modest.
17. For gold stocks to have the kind of sustained bull cycle that gets most gold bugs really excited, it's going to take many more rate hikes and a reversal in money velocity.
18. That has yet to happen, but Rome, and substantial inflation, are not built in a day!
19. To view the rate hike oriented inflation building process in action, please click here. When I first predicted that the Fed would taper QE to zero and begin a hiking cycle, I suggested that bank stocks would massively outperform the rest of the US stock market, and that would be followed, slowly, by a key reversal in money velocity.
20. All is playing out according to my prediction, but gold stock investors need to understand that two rate hikes in two years are not going to produce a key reversal in money velocity. More hikes are required, and the good news is that more are coming!
21. Please click here. Double-click to enlarge. This chart of the BKX bank stocks index versus the S&P500 shows bank stocks have delivered the massive outperformance I predicted, and that's after just two rate hikes.
22. All gold stock enthusiasts should also be bank stock enthusiasts. Here's why: In a market meltdown, banks tend to get gargantuan free money handouts from governments, albeit at the expense of working class taxpayers. They get food stamps, bowls of soup, and cracker crumbs.
23. This makes the ability of banks to survive market downturns truly remarkable. The potential upside reward for bank and gold stock shareholders during a long term hiking cycle is fabulous.
24. Gold stocks and bank stocks are like lovebirds. As the Fed steps up the pace of nominal hikes in 2017 and 2018, that hiking will make real rates (inflation minus the nominal rate) drop further. Money velocity should reverse by late summer, just in time for gold's strong season!
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