Alasdair Macleod and Michael Oliver Agree on Outlook

Looking at key market metrics, it seems we have had a tinge of a risk off syndrome and perhaps a small whiff of inflation. I say that because stocks have been weak over the past week of trading while Treasuries and gold have been quite strong. A whiff of inflation may be evident with the Rogers Raw Materials up a bit and silver quite strong.

Michael’s Major Market Watch

Michael Oliver has been talking about two very quiet but major markets to watch for a hint at when gold may begin its next move. Those two markets are the Dollar Index (below left) and the Bloomberg Commodity Index (below right). Both of these markets were shown as of December 27. Regarding the Dollar Index this is what Michael wrote at the end of last week in his 360 Weekend Report:

We had suspected that when the Dollar turned south and commodities north, the events would more or less coincide. It appears that will be the case. 

The Dollar Index is currently below its 3-qtr. avg. and the zero line structure that it’s used all during 2019. A December monthly close below 97.27 will accomplish that breakage/sell signal. Such a downturn in the Dollar will no doubt enhance the gold bull trend that went into pause mode several months ago, and it will assist a renewed “commodity inflation” ambush which so few expect. 

UPDATE: The dollar closed this week at 96.94, down from 97.01 on 12/27.

Regarding the Bloomberg Commodity Index this is what Michael wrote last week:

BCOM is well above its needed quarterly momentum breakout level (a monthly close above 79.35). It looks like breakout is underway. And again we have a situation that market analysts are hardly pounding the table over. All eyes and hearts are fixated on the glory of the U.S. stock market. 

We argue that a down Dollar and the initial surge in commodities (the beginning of a major bull in our view) will upset the table settings of the stock market 

The Fed (and its cohorts in Europe and Japan) have been hoping to create “inflation.” If we define inflation narrowly as they tend to do (they don’t consider a vertical stock asset category a result of monetary inflation for obvious political reasons), then they will get what they’ve been hoping for. 

We argue that the first surge by BCOM will likely carry about 30% and probably with upsetting speed. (There is a secondary major momentum breakout level—we will specify in next quarter—that won’t take much more gain to also engage.) 

Now one might say that at that point the CBs will smile —“objectives achieved” and attempt at some future point to restrain the inflation in some delicate policy manner. We bet not. Why? Because the stock market will begin to fail with these two events (Dollar down, commodities up) and the CB’s focus will then shift toward saving their equity markets (à la Bernanke’s explicit policy goal to inflate stock prices). Meaning even more monetary flow and fake rates on their part, which this time around will not flow where they want it to, but will simply supercharge the gold move and the commodity asset category advance just now getting into gear in the wake of gold. 

The CBs will have a major problem, and we bet—based on their intellectual underpinnings, statements, and intents—that the developed economy CBs will become even more aggressively “inflationary” than their policies are now. And all to defend their equity markets. 

So watch the Dollar and BCOM. They are technical and fundamental torpedoes of size.

UPDATE: BCOM closed this week at 81.37!

So there you have it! I have been watching the dollar and BCOM since Michael has been talking about those two markets over the past few weeks. Those two very substantial but slumbering markets have awakened from their long slumbers and have dramatically broken through important structures. The dollar is heading lower and commodities higher.

What happens next? If commodities are truly about to rise in price and the masses can no longer be pacified by BLM propaganda numbers, what happens politically? More important, what happens to institutions and individuals with money? Why would they buy U.S. Treasuries unless rates begin to rise dramatically to provide real rates of return? And we know now from the Fed’s attempt to downsize its balance sheet that the equity markets will begin to tank as they did when Powell was forced to “pivot.”

It has been reported that since September, 90% of new U.S. Treasury borrowings have been funded by the Fed. Apparently it had to do that in order to keep rates from rising, which in turn would most likely trigger the next equity market disaster. For years after gold was removed from money, we Americans lived beyond our means, borrowing from countries that ran surplus trade accounts. But Japan now needs its savings to take care of its own population, and why would the Chinese lend to us when we are in a trade war with them and when they along with the Russians and Iranians and possibly the Turks are setting up their own financial systems? 

Alasdair Macleod Agrees with Michael Oliver

What I find so fascinating is the fact that Alasdair Macleod as a fundamental analyst pretty much agrees with what Michael is seeing from his technical perch. I am going to be interviewing Alasdair next week on my radio show about a recent piece he wrote, namely “Bond Worries & Gold,” and also about his latest essay, titled, “Gold’s Outlook for 2020,” in which he provides the following overview of that six page essay:  

There is evidence that US Treasury bond yields may continue to rise, exposing the debt trap in which the US government finds itself. Market participants don’t realize it yet, but the dollar-based monetary system is spinning out of control. This will become obvious as the crisis stage of the credit cycle, which we now appear to be entering, becomes evident.

The outlook for monetary inflation is dire. Not only will governments fund themselves through QE, but central banks will be forced to inflate even more to pay for government deficits significantly greater than currently forecast. And when markets stop taking government statistics on inflation as the Gospel Truth, the interest cost of government funding will rise and rise, reflecting an increasing rate of time preference for fiat currencies which will be losing their purchasing power at an accelerating rate.

In a world where all fiat currencies will face enormous challenges, using yardsticks such as trade weighted indices will be misleading. The best gauges of the slide in fiat currencies will be commodities, particularly commodity monies, gold and silver.”

Clearly Alasdair sees these economic factors starting to put the pressure not only for an upward move in gold but in other commodities due to low rates of interest in paper money products below investors’ time preference rates. Positive yield curves for gold and other commodities are holding their own and are now above those of very low fiat money rates so that substitution of monetary metals for U.S. Treasuries becomes a viable option. For example, I recently leased a small amount of gold through Monetary Metals in which I receive a 2¼% interest rate with interest payable in gold at the end of one year. Moreover, principal and interest are returned in gold, which retains its purchasing power over time—unlike the dollar, which has lost over 95% of its purchasing power since the Fed was created in 1913. 

Alasdair’s article provides evidence that the bullion banks that have acted to suppress the gold price over many decades appear now to be losing capability to keep a lid on the price of gold. I hope to talk to Alasdair about that as well as other related market dynamics that in the end reveal that the elites who use all manner of propaganda to perpetuate the status quo ultimately lose when they insist over time to defy the laws of nature.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.