Here’s an interesting question for you…
On Friday in the US, the non-farm payrolls report all but confirmed the Federal Reserve will raise interest rates when they meet next week. The employment number for November came in at 211,000, beating expectations.
US markets surged by around 2%. Is this a sign that stocks have priced in, and are comfortable with, the rate rise story? Maybe, but that’s not the question I’m asking.
What was more interesting was the move in the precious metals — gold and silver.
Normally, gold and silver fall heavily on a strong employment number. Rising employment means higher interest rates, which is negative for precious metals.
Which brings me to my question…
Why did gold jump 2.3% and silver surge 3.4% on the release of such a strong employment number?
Was it just a technical move? I mean, in the gold futures market, for example, traders went into the employment release with the most bearish position on gold ever. Maybe there were just no more sellers to push prices down? That made the other ‘shorts’ nervous and they panicked. The result was a strong rise as the short sellers covered their positions by buying them back.
That’s the likeliest explanation. But there is one other point to the story worth considering…
That is, inflation. The employment numbers in the US have been strong for some time. Despite this, the Fed will keep interest rates low for years. Its aim is to keep real interest rates negative for as long as possible. (The real interest rate is the nominal rate minus inflation…as inflation rises the real rate falls).
Negative real rates are the only way to inflate an economy out of its debt hole. That is what central bankers the world over want to achieve. European Central Bank boss Mario Draghi said it loud and clear last week. In an interview on Friday, he said that a central banks balance sheet is now a major policy tool, and that it has no limits:
‘In the end, let me say one particular thing about what’s becoming the main policy instrument today – namely our balance sheet. Often people ask, ‘What’s the level – what’s the maximum expansion in your balance sheet?’ Well, the balance sheet of a central bank is a monetary policy instrument. As such, it should be utilized to the extent that is necessary to achieve the objective that our mandate asks us to achieve – namely an inflation rate that’s below but close to 2%. There isn’t any specific limit in using this. In conclusion, I think that we have the power to act. We have the determination to act. We have the commitment to act.’
In other words, the ECB will continue to expand its balance sheet until it gets the inflation it wants. The problem here is that inflation doesn’t behave according to the wishes of central bankers. It lays dormant for years…then takes off.
Maybe that’s what gold and silver got a whiff of on Friday? The coming inflation…
I’ve come up with a way to play this emerging trend. If Draghi keeps going down this path, gold and silver will soar. The thing is, many precious metals stocks are still 80–90% down from the highs of 2011. It’s been a devastating bear market.
This is where I think one of the big opportunities lies in 2016. It’s in going over the bones of this decimated sector and finding the turnaround story.
This is where you find potential ’10-baggers’…stocks that could go up 10 times or more.
I’ve found one such candidate. To be honest, it’s an ugly story. It’s not on anyone’s radar right now. But you don’t get big potential rewards from investing with the herd. You’ve got to head off on a solo expedition to find big winners.
Anyway, I think I’ve found something special. But it’s early days, so I’ve devised a low risk way to gain exposure. You can check out my full report on the story here.
I mentioned that US markets had a strong day on Friday. I haven’t shown a chart of the Dow Jones index for a while, so here it is, below…
As you can see, the market recovered strongly after the sharp sell-off in August.
But that is what normally happens. After a significant price decline, you nearly always get a bounce back and an attempt at the old high. The bounce back rally in the Dow found resistance just below the old highs.
You then saw another correction in mid-November and a smaller one just last week. Both found support at the 50-day moving average. From a short term view you could say this is encouraging.
On a longer term time frame though, the Dow is looking tired. Have a look at the three year chart, below:
The Dow needs to at least remain above the moving averages here. The bulls would ideally like to see it go on and make a new high in early 2016.
While I’m sceptical, history is on the side of the bulls. 2016 is a presidential election year. These years are usually bullish for stocks. A major exception was in 2008, when the financial world crumbled around Dubya’s exit and Obama’s entrance.
But if the Dow turns back down from here and breaks below the moving averages, it’s a bearish sign.
That needn’t concern you though. The stock market, after all, is a market of individual stocks. In the special report I mentioned earlier, I show you one Aussie stock that jumped 1,200% in 2015 while the broader stock market went backwards.
These opportunities are out there. If you can get on board, it could make a big difference to your overall portfolio performance in 2016.
Click here to read about the ASX-listed stock I believe has the potential to make a big move like the one I just mentioned in 2016.
For The Daily Reckoning