Recently the odds of a Federal Reserve interest rate hike in March has spiked higher even though the FED had been telegraphing that every meeting is live.
The two conditions set by the FED, the unemployment rate, has been below the 5% level they associate with NAIRU (non-accelerating inflation rate of unemployment) and the inflation rate, which has been around and recently above the 2% threshold certainly indicate a live meeting.
However, this higher probability of a rate hike has not done much for the US Dollar.
Even with the muted Dollar move, gold has declined.
As have the large gold companies represented by the ETF GDX.
Also seen in the junior and exploration golds represented by the ETF GDXJ.
The ratio of GDX to GDXJ appears to have bottomed and turned higher. This means the speculative companies are declining faster than the senior gold miners.
In rising markets the miners tend to lead the metal higher and vice versa in declining markets. Recently the ratio of Gold to GDX has been rising, indicating that the miners are declining faster than the metal.
In rising gold markets, silver should outperform gold and the Gold to Silver ratio should decline. In declining markets the opposite should happen. This ratio has turned higher recently.
Recently there has been a lot of optimism by mining CEOs and the gold promoting industry (newsletters) that this is the year for the big break out and the death of the US Dollar. Maybe they are correct. But maybe not.
Google Trends is an interesting way to determine public sentiment. The below chart is the plot of the search for the phrase “Gold Bubble”.
Admittedly the data is choppy. However, each one of the circled spikes (picked because they were very sharp) coincides with a multi-year decline in gold prices. The search frequency does not seem to spike prior to the beginning of the decline but after it has started so it is not a predictive tool, however, it is interesting. Is the recent increase in searches going to become a spike? It is too early to tell.
One caveat I would like to present is that seasonally this time of year tends to be weak for the gold market. The metal has a history of peaking in February and remaining weak until July.
While the gold stocks tend to also peak in February but begin to do well by the end of March.
One final contrary indicator is that on the night of the election I received a text message from someone I consider a terrible investor. Buys the highs and sells the lows (not referring to you Jim – you have a great gut) suggesting everyone should go out and buy gold. At that point gold was up $60 on the Trump victory, however, by the next day gold closed lower and has been declining since. Nobody ever texts me with advice to buy the lows, it is always the highs!
Maybe this is just the seasonal decline and we should know by the end of the month, but something suggests to me that that there could be further weakness.
Or maybe, I have felt for the last year the run up in gold and gold stocks is the final head fake before declining to below $1000 and washing out all but the strongest believers setting the stage for a multi-year bull market and this is just the beginning.
Or maybe the gold stocks are just forecasting a 50 basis point rate increase.
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