The New Year Bring in a Bull Market for Gold

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Why Will 2018 See Bull Market in Gold –

The current trend gold is now showing is undeniable. Add to this fact the historical trend line that occurred after Fed raised interest rates and the only conclusion can be markets are primed for bear market in gold.

  • Gold rose eight and one-half percent (8.5%) in 2016 and then rose further twelve percent (12%);Gold had solid gains in both 2016 and 2017 this demonstrates gold. These decisive gains evidence the solid foundation gold has for bull market. Some are calling for gold reduction to $800.00 per ounce but this does not seem likely. Below we discuss why a bear market in gold seems unlikely.
  • Gains in the stock market may continue in the short term but most certainly are unsustainable and downward correction in the range of thirty percent or more are likely.
  • While it is true gold so a couple of short downturns investors should consider the long term trend gold has shown and consider the noticeable possibility of rescission, volatility and liquidity crisis.
  • Gold in the historic 1999-2011 rally started its bull run slowly, then starting in 2005 had its largest percentage gains.

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Historical Lesson ADDED TO WHY GOLD WILL SEE THE BULL MARKET

  • Fed raised interest rates on December 16, 2015, immediately after gold increased from $1,062.00 per ounce to $3,346.00 per ounce.
  • Fed again raised interest rates on December 14, 2016 and gold once again rose from $1,128.00 per ounce to $1,346.00 per ounce.
  • Finally just last month, December, 2017, the Fed raised interest rates and gold responded by rallying from $1,240.00 per ounce to $1,258.00 per ounce on December 14, 2017.

If we apply this pattern from the previous two rate hikes Gold could easily rally to $1,400.00 or $1,500.00 per ounce by summer.

– Source, James Rickards via the Daily Reckoning

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A Financial paradox

Federal Reserve and its  actions

The Federal Reserve was created in 1913 and given the mission of maintain moderate long term interest rates, price stability and full employment. In order to accomplish its task the Fed raises or lowers short term interest rates (“federal Funds” rate). It does this through open market operations. Banks must keep sufficient funds on deposit either in their institution or at the Federal Reserve Bank to meet planned and unexpected outflows. Each banks needs constantly change and when a banks reserves are not sufficient to meet its outflows then it can borrow from another bank to meet its outflows (these loans take place in “federal funds market”). The rate charged for borrowing these funds are call federal funds rate. When the amount of reserves in the federal funds market are greater than demand then federal funds rate falls. So the amount of reserves is key to the interest rate. The tool available to the Fed to affect the supply of reserves is — open market operations. The Fed buy and sells government securities (bonds).

So it is important to realize that bonds are sold to reduce or increase the money supply and not to pay obligations (debts of the US Government).

The Paradox How can Tighter money result in easier financial conditions.

It is well accepted that in order to cause inflation you need to ease financial condition, i.e., increase the money (reserve) supply and

The Fed’s goal is to  increase inflation to 2% and has spent trillions of dollars but failed to reach this meager goal.

It is also well accepted principal that tighter market is bad for the stock market;

yet:

  • The Dow is seeing levels approaching 25,000, along with new record being set every day by th S&P. Additionally, the Nasdaq is up over twenty-five percent.
  • On the other hand the global risk-free rate as determined by Bank of England is at the lowest level since the 1300’s. [i.e., the rate of return and an investment with no ( zero) risk attached to it.
  • What does Fed make of this paradox?

Mona Mahajan, strategist with Allianz, says the paradox has “been puzzling to the Fed.”                     DA