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As forecast: The Gold Bull Run has begun

How high, how low can it go?

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President Donald J. Trump signs The Taxpayer First Act in the Oval Office
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Governor Jerome H. Powell testifies before a joint hearing of the Senate Banking Subcommittee
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In our 6 June Trend Alert, when gold was $1,332 per ounce, we forecast that a series of converging trend lines, including “weakening economic fundamentals and how central banks will address them — from Australia cutting interest rates to new lows, to China inventing money pumping schemes to artificially inflate falling equities and its sagging economies with cheap money” — would ignite the next Gold Bull Run.

Gold has jumped to six-year highs, hitting $1,438.63 an ounce in late June and now hovering around the $1,420 an ounce mark on the expectation more central banks will cut rates and introduce other stimulus measures to temporarily and artificially offset the impact of a sustained global economic slowdown.

While the main driver pushing gold prices higher will be central banks lowering interest rates, gold, the ultimate safe haven asset, has also been pushed higher by geopolitical tensions across the globe, particularly between Iran, Israel, Saudi Arabia, and the U.S. (see Nations on the brink feature in this edition)

FOLLOW THE TREND LINE

Last October, in our Trends Journal, we stated:

“As we have long forecast, the higher U.S. interest rates rise, the lower gold goes. The stronger the dollar becomes, the lower gold goes.

It’s a simple equation. The higher rates increase, they boost the dollar and push up U.S. Treasury yields, making gold a less attractive investment since it does not bear interest.”

When these dynamics reverse course, as we have been forecasting, gold prices will rise. And that’s exactly what is unfolding now.

Specifically, we had maintained that the bottom end of gold was in the $1,200 range and that prices would have to break above $1,450 per ounce to leap back to the $2,000 range it neared in 2011.

GLOBAL ECONOMIC SLOWDOWN

The data don’t lie. Global trade growth has slowed to its lowest rate since the Panic of ’08.

Manufacturing output has reached sustained negative growth rates in many countries. The eurozone’s Purchasing Managers Index dropped to 47.6 in June, the fifth month below 50, a watermark that indicates contraction. In the UK alone, the PMI dropped to 43.1, the lowest mark since 2009.

In China, manufacturing productivity fell to a 10-year low, driving its PMI down to 49.4.

From the U.S.’s PMI falling to its lowest level since Sept. 2009, to the Czech Republic, Germany, Spain, Japan… PMI rates across the globe are contracting.

Furthermore, from Brazil to South Africa, nations are slumping into recession. In June, the World Bank warned of “a deepening slowdown in global trade, and sluggish investment in emerging and developing economies.”

IT’S ALWAYS BEEN ABOUT INTEREST RATES

In our 27 March Trend Alert we forecast that a global economic slowdown and weakening corporate earnings in the U.S., coupled with the fading positive effects of President Donald Trump’s tax bill, would compel the U.S. Federal Reserve “to lower interest rates before economic conditions markedly deteriorate.”

Indeed, the U.S. Federal Reserve is expected to cut rates later this month, signaling that fears the global economic slowdown is sustained.

Australia has cut its interest rate twice in two months to 1 percent, a record low. China is introducing a series of new money schemes, from consumer rebates for purchases of appliances and other items, to record low interest rates on small business construction loans.

European Central Bank President Mario Draghi has recently indicated more stimulus would be needed if the economic trends stayed the current course, news that drove the euro down 0.5 per cent against the dollar, reaching a low of $1.12 on that day.

With all signs pointing to central bank intervention to boost equity markets and economies with increased flows of cheap money, plus exploding global debt, declining economic growth and geo-political instability, gold, the ultimate safe-haven asset, will increasingly emerge as a sound investment.

In fact, we have repeatedly underscored that when gold starts to move aggressively upward, that trend would signal a more aggressive downturn on the horizon in equity markets and economies.

In our 30 May Trend Alert, we warned: “How severe is the current market turmoil? Watch gold, the safe-haven asset. Stuck in the high $1,200 per ounce trading range, it is not signaling danger ahead. When gold spikes above $1,450 per ounce it will signal true market fears.”

Another indicator to watch is U.S. Treasury Bond yields. The 3-month Treasury bill rate, currently at 2.21 percent, is paying more interest than the 10-year Treasury note at 2.07 percent. And the 2-year Treasury rate plunged 7.9 basis points in July to 1.82 percent.

Yield curve inversions have occurred before each of the last seven recessions within 5 to 16 months before recession hitting.

Moreover, beyond boosting sagging economies, central banks will aggressively pump more cheap money to keep propping up equity markets. Indeed, when stock markets crash, it’s a signal to the general public that economic disaster is on the near horizon.

MIDDLE EAST WAR DRUMS BEATING LOUDLY

One dynamic that has been underscored in our economic forecasts has been the prospects for war with Iran, that have dramatically increased in recent months.

As geopolitical tensions intensify in the oil-rich Middle East – fueled by the crippling economic sanctions President Trump’s administration has imposed on Iran and the blatant, outward threats of military action against the country made by Secretary of State Mike Pompeo and senior advisor John Bolton – chances of war are as great as they have been since Trump took office.

Should tensions escalate further and push crude oil prices up to the $80 - $100 per barrel mark, already fragile economies will decline into recession/depression and equity marks will crash. TJ 


TREND FORECAST

We have repeatedly stressed that more artificially induced stimulus measures will only temporarily stave off recession while further inflating the $250 trillion global debt bubble, leaving economies more vulnerable to severe downturns that will crash equity markets.

More monetary central bank stimulus, more economic indicators reflecting sustained downward growth worldwide, diminished currency values and rising prospects for war are the ingredients for gold to shine.

On the low end, we forecast gold’s bottom in the $1,270 range. And we maintain our six year forecast, that once gold sustains value above $1,450 per ounce it will then spike to $2,000 plus.