first majestic silver

Janet Yellen: Gold Rally Catalyst?

President of Graceland Investment Management
December 16, 2014

stock market chart

1. Is Santa Claus coming to town this year?  For US stock market investors, it looks like the Grinch just stole Christmas!  
 
2. Stock markets around the world are reeling, under pressure from the tumbling price of oil.  On that daily chart of the Dow, it appears that all of this year’s gains may soon be lost.  
 
3. The FOMC meeting begins today, and Janet Yellen holds a press conference tomorrow afternoon.  The Fed has consistently failed to raise inflation to their comfort zone, and the global oil price crash will make their job even harder now.  
 
4. If all the Fed says at the press conference is that “lower oil is good for consumers,” I’m concerned that institutional investors may lose confidence. The current global stock markets decline could morph into a horrific crash.
 
5. In the big picture for gold, I’m vastly more focused on Chindian demand versus mine supply, than I am on anything that the Fed says or does.  Regardless, if the Fed leaves the “considerable time” language in their statement tomorrow, that should provide a nice short term boost to gold prices.   

daily oil chart

6. That’s the daily oil chart.  Lower fuel prices may not be good for the Dow, but they should help gold mining companies lower their cost of production.  
 
7. Even mainstream news outlets like CNBC are recommending that investors buy gold stocks now, and I think that’s a wise move on their part.
 
8. “Of course, it hasn't been a great year for many commodities. Gold, too, is off of its highs, which makes Bill Baruch of iiTrader think it could succumb to tax-related selling in the sessions ahead. Still, Baruch says the better trade isn't going short for the short-term, but looking for the buying opportunities that tax-pressured selling could create.” – CNBC News, December 14, 2014.

junior gold stocks

9. Junior gold stocks are suffering some “tax loss selling,” but their overall decline is very minor compared with 2013.  
 
10. That’s the daily GDXJ chart.  In 2013, the price declined from about $85 to $29, and terrified many investors in the gold community.  This year, it’s declined from $29 to $22.  Note the difference in the slopes of decline on the chart.
 
11. I think 2015 will be a good year for both the juniors and bigger producers.  While deflation from lower oil prices will affect the prices of many consumer goods, the price of gold is largely determined by demand from China and India.  
 
12. That demand continues to grow, and in the case of India, it’s inelastic.  “GST will replace the plethora of indirect taxes — excise, sales tax, service tax, entry tax and other local levies — with one single levy, helping create a national market for goods and delivery of services. State-specific levies and entry taxes lead to loss of revenue and cascading of taxes — taxes on taxes. Some estimates suggest GST could add as much as two percentage points to GDP. The government feels the improving fiscal situation because of softer crude prices and decontrol of diesel has given it room to meet compensation demands.” – The Economic Times, December 16, 2014. 
 
13. Note the prediction that the GST tax will add almost two percent to Indian GDP growth.  I’ve predicted that India is on the cusp of entering an era of double digit GDP growth, an era that will ultimately create gold demand that is five times the size of the already-enormous demand in China.  

weeky gdx chart

14. That’s the weekly GDX chart.  A double bottom pattern is beginning to form, and the lower volume in the area of the second bottom suggests this should be a “textbook” formation.  

daily gdx chart

15. That’s the daily GDX chart.  It’s clear that volume is shrinking as the second bottom forms.  My gold shares position has never been this large, and I’m ready for a fabulous year in 2015.
 
16. I’ve suggested repeatedly that the world’s biggest geopolitical driver of the price of gold is the relationship between Pakistan and India, particularly in the Kashmir “Line of Control” region.  
 
17. Both nations have significant stockpiles of nuclear weapons.  If Pakistan’s government were to become unstable, the situation could quickly escalate into a nightmare scenario.  
 
18. Please click here now.  The Taliban and ISIS both want to rule Pakistan, and if they are even partially successful in achieving that goal, I would expect the price of gold to move significantly higher.  
 
19. Gold investors need to keep a very close eye on geopolitical events that occur in Pakistan, and particularly in the Kashmir region.  
 
20. I have received a number of emails from investors in the gold community, asking about the decision of the CME to implement price limits (collars) for gold and silver futures contracts.  Collars can create violent price movements, because investors who get margin calls can’t liquidate when the price is halted.  When trading begins again, the price can gap higher, causing another trading halt.  
 
21. Investors who are carrying large leveraged short positions could be wiped out if a series of trading halts were to occur while the gold price was moving violently higher.  
 
22. I want to finish today’s update with a look at the US dollar versus the yen.  Over the past few months, a lot of forex traders thought gold would crash when the yen did, but that hasn’t happened.  Gold has little risk from a rising dollar, because most Western investors don’t have any gold to sell, and Eastern buyers mainly buy jewellery for cultural and religious reasons rather than for investment. 

23. A falling dollar will make gold attractive to Western institutional buyers, which is a win-win situation for the gold community!  That’s the weekly chart of the dollar versus the yen.  

hourly bars chart

24. That’s the hourly bars chart.  Note the head and shoulders top pattern that is clearly in play.  The dollar looks set to crash against the yen, and I suspect Janet Yellen’s press conference could be the catalyst, and create a nice gold price spike to the upside.  Rather than end 2014 on a down note, gold seems set to shock the gold community, and end the year with a big rally!

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