Rejoice: A New Gold Bull Has Been Born

by Jason Simpkins, Outsider Club Gold is off to its best start to a year since 1980, up about 10%. Why? Because investors are simply catching on to the fact that the Fed’s empty promises of a 2015 rate hike are just that. Indeed, the ECB’s decision to launch its aggressive 1 trillion euro quantitative easing program has all but ensured the Fed won’t raise rates. And gold is roaring back as a result. The Race to the Bottom For the past year, the world’s biggest economic powers, from Europe to Asia, have been engaged in a full-blown currency war. It actually started last June, when the ECB took the unprecedented step of turning its interest rates negative. It started buying up covered bonds and bundled bank loans, too. But that wasn’t enough. Deflation and non-existent growth persisted. So, yesterday, the ECB went nuclear with a $1.2 trillion QE program. Among other things, this is a blatant attempt to devalue the euro — the same way the Fed devalued the dollar. In fact, the currency suffered its biggest daily fall in over three years yesterday. But here’s the thing: It’s not just Europe. Japan is in a similar position. It’s increasing its monetary base by $674 billion each year. Even China has gotten in on the game. In November, Beijing announced its first interest rate cut in two years. And the country still recored its weakest annual expansion in 25 years. Basically, every major economy outside the U.S. is loosening monetary policy and devaluing its currency. QE was prematurely pronounced dead. The result? A stronger dollar. The dollar is up 18% against the euro over the past year. It’s up about 17% against the yen in that time. Dollar Index 6 Month In all, the Dollar Index, which measures the greenback against a basket of currencies, is up 15% over the past year. Now, with the Eurozone’s latest decision, it’s poised to strengthen even further. And that will mean only one thing if the Fed doesn’t act: Deflation. The Dollar Dies, or Else… U.S. consumer prices had their biggest monthly fall in six years in December, with the CPI slipping 0.4%. That’s the biggest price drop since the Great Recession. In fact, for the whole year, consumer prices rose just 0.8%. That’s well below the Fed’s long-held 2% target. You do remember the 2% target don’t you? The Fed certainly does… From its December statement: “When the Committee decides to begin to remove policy accommodation [read: raise interest rates], it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2%.” In that same statement the Fed said it “expects inflation to rise gradually toward 2% as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.” That’s pretty generous expectation, in my opinion. Headline unemployment was 5.6% in December. How much lower does the Fed expect it to fall from there? And just how ‘transitory’ will low energy prices be? How quickly will they ‘dissipate’? Some analysts are predicting oil will fall to $30 per barrel in the next few months. And even the ones that believe crude will recover don’t see it bouncing back to $100 per barrel overnight. Natural gas and coal prices aren’t going anywhere, either. The truth is, we’re not likely to see a significant jump in energy prices. At least, not this year. Continue Reading>>>

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