Up one day.
Down the next.
Financial markets have been crazy this year. The volatility has been difficult to swallow.
The uncertainty has benefited gold. The yellow metal is up about 26.3% from its December 2015 low.
Most gold stocks have outperformed the spot price. That’s because they were trading, on average, 95% below their 2011 highs. The average gold stock is up 110% this year. The best gold stocks have gone up three to five times already…or more.
The question is, with gold having now pulled back 3.78% from the July high, what’s next?
Should you lock in your gains, or have a punt?
The answer hinges on…you guessed it, the US Fed.
Why one crazy number matters
FXStreet reported on Friday night:
‘Dollar bulls were subdued following August’s soft non-farm payrolls [NFP] headline figure of 151,000 [expectation: 180,000], which quelled expectations over the Federal Reserve raising US interest rates this year.
‘Gold received a welcome boost with prices trading towards US$1,330 following the disappointing NFP, which cooled the heated hopes of the Fed stepping forward.
‘With a weak dollar potentially becoming a dominant theme following today’s disappointment, gold could be open to further gains in the future. Concerns remain elevated over the global economy, which could propel the precious metal higher as investors flock to safe-haven assets.’
FXStreet makes a good point. The US non-farm payrolls number is important. The Fed pays close attention to jobs creation. And this month’s number underperformed expectations.
With punters thinking the Fed will backflip again, gold could easily push higher.
A fortnight ago, when central bank players met at Jackson Hole, punters thought the Fed might raise rates this month.
Fed Vice Chairman Stanley Fischer told Bloomberg TV, ‘We choose the pace on basis of data,’ and that US ‘employment is very close to full employment.’ Fischer also said, in other words, to pay close attention to this month’s payrolls number.
Well, it was a disappointment. We know that much. And that throws everything into contention.
Down from last year’s pace of 230,000, non-farm payroll gains have averaged about 185,000 per month this year. While that doesn’t seem like a lot to us, it might be OK for the Fed.
We know the world economy is stuffed. But central banks are deluded. Their models show that the world is fine. That’s why they keep talking about raising rates.
New York Fed President William Dudley said that it’s premature to rule out a rate increase this year. ‘Even 150,000 job gains per month would be consistent with gradually using up any remaining slack present in the U.S. labour market,’ he told the Wall Street Journal.
It sounds crazy, I know. But, with the payrolls number exceeding that 150,000 level this month, a rate increase could still be on the table this month.
The clock is counting down
CME Group’s Fed Watch tool is showing a 21% chance of interest rates going up this month. The percentage is down from 24%, before the payrolls number. In other words, the market is calling the Fed’s bluff.
Financial markets need some direction. Dudley, Fischer, or Yellen should come out and tell us what they are thinking. If they signal a rate increase is on the table, it probably won’t be good for gold. According to Reuters last week (before the payrolls announcement):
‘Gold is highly sensitive to rising U.S. interest rates, which increase the opportunity cost of holding the non-yielding asset while boosting the dollar, in which it is priced.
‘“Technicals show that gold and silver prices need some correction and will see some mild rebound. But Friday’s jobs data is going to be crucial,” said Jiang Shu, chief analyst at Shandong Gold Group.
‘“If the jobs data is going to be good, gold will fall to $1,260-$1,270 levels as markets will hope for a rate hike in September.”’
It’s amazing how much power one number has…
If the US Fed signals a rate rise, Jiang Shu could be on the money. That would likely hit most — but not all — gold stocks into the 20–21 September Fed meeting. If this happens, and you want to know what to do, read on…
Don’t overthink it
First, I’ll answer the initial question: Should you lock in your gains or have a punt?
Until we get some direction from the Fed, I’d lock in your best gains. You can’t go broke taking a profit. And, if gold falls, you will probably be happy that you sold.
Now, contrary to the advice above, I also recommend having a punt…
There’s huge potential remaining in the speculative end of the gold market. That’s where punters have seen hundreds of percent in returns just this year alone. For example, West African Resources [ASX:WAF] brought investors nearly ten-fold returns in under six months this year.
In my view, speculative stocks still offer the best opportunity today. These stocks can outperform, regardless of the gold price.
For The Daily Reckoning
Editor’s Note: Speaking of the potential of speculative stocks, Jason just tipped a new speculative gold stock in Resource Speculator. And it burst out of the blocks, up 70% on his recommendation. Whether the gold price goes higher or lower, this stock can still surge significantly higher in the months ahead. For more information, go here.
Editor’s note: This article was originally published in Money Morning.