March 3, 2017
Since all of the Fed Goon jawboning this week has now raised the odds of a March FOMC rate hike to 147%, we thought it best to write today with some perspective on the past...perhaps unearthing some clues as to why Comex Digital Gold seems to rally every time The Fed hikes rates.
The challenge for your host is to somehow make this case logically through the written word only, when this information might be better presented through a podcast. But here goes...
As we discussed yesterday, this is your most compelling chart at present:
We all noticed yesterday that, even as rate hike odds hit 115%, CDG and CDS refused to break substantially lower. Now today, with rate hike odds at 159%, CDG and CDS are once again hanging tough. Yes, they're both down a little but, as I type, CDG is only off $7 at $1242 with CDS down just 10¢ at $18.38. So, what's the deal?
I think the answer lies in history...and not just the most recent history.
Many of us came to the sector after the onset of The Great Financial Crisis and it seemed that the dollar price of gold and silver was tied to dollar devaluation and sharply falling interest rates. And why wouldn't you feel that way? 2010 and 2011 saw sharply rising prices and record highs while rates and the POSX plummeted. HOWEVER, this analysis ignores what happened before 2010 and I think THIS is what we may need to focus on for a while.
Do you recall seeing charts like this back in the day?
The dollar price of gold followed almost precisely with the rising level of US debt. And take a good look at that chart. From 2003-2008, the dollar price of gold rose from $300 to $1000...that's 3X!...all the while, the total US debt rose by 50% from $6.5T to $10T.
And here's what you need to consider...The period of 2003-2008 was NOT a period of steeply falling interest rates. See below. This chart is the US 10-year note rate from 1/1/03 through 1/1/08:
So, if we step back and consider price history that extends back beyond just the 2010-2011 timeframe, it might be quite plausible to expect higher gold prices AND higher interest rates as US debt levels continue to soar under The Don's tax and spending plans. A more recent and longer term chart of debt and gold is posted below. We all know how this trend has disconnected over the past few years but, as this chart shows, this isn't the first time this has happened. Note the period of 1995-2003...and then note how quickly the price of gold rushed to catch up!
So, with the period of 2003-2008 as a guide, we can plainly see that gold in fact CAN and DOES rise during a period of flat/rising interest rates. This, in part, explains why CDG has rallied from the last two rate hikes and likely explains the relative firmness in price this week. (Of course, now I look and I see that suddenly The Banks have decided to smash price while I've typed!)
One more piece of the puzzle needs to be put into place. As you can see below, the period of 2003-2008 also saw a rather significant drop in the dollar. It fell by about 25% over that time period as the DXY began 2003 near 100 but was near 75 by 2008.
While the dollar has rallied since the election of Trump, the new American president has indicated that he may prefer a weaker U.S. dollar in order to help with his international trade programs.
Are we entering a period of higher rates, higher debt levels and perhaps a weaker dollar? If so, there's historical precedent of steeply rising gold prices under these conditions and this might explain the last two rallies from FOMC rate hikes as well as the current strength in gold in the face of another, pending Fed Funds hike.