Gold Is About to Get a Big Boost From the Fed
Trump versus the Federal Reserve... Investors price a rate cut in... Morgan Stanley says 'get out'... Global uncertainty weighs on everyone... Gold is about to get a big boost from the Fed... How to take advantage of today's market conditions...
U.S. President Donald Trump was tweeting about the Federal Reserve again this morning...
Unless you've been avoiding the news, you probably already know the pitch...
Trump wants lower rates. And he wants them now.
Here's exactly what he said:
This comes after Trump's tweets on Friday about the U.S.'s second-quarter gross domestic product number, up 2.1%... and the Fed's role in it.
"Not bad considering we have the very heavy weight of the Federal Reserve anchor wrapped around our neck," Trump said.
Well, the market wants lower rates, too...
As regular Digest readers know, lower rates are already priced in...
CME Group, the global markets company, runs a "FedWatch Tool." It looks at its "30-Day Fed Fund Futures" pricing to gauge expectations.
That makes the tool what we call a "real money indicator," because it measures the bets that traders are actually placing. And the message right now is pretty clear.
Expectations place a quarter-point rate cut coming out of this week's Fed meeting at 72.9%. And the expectations for a half-point rate cut currently clock in at 27.1%.
That leaves exactly no one expecting inaction from the Fed. And Fed-speak aside, Powell has made it pretty clear that a small rate cut is coming.
So it's interesting to see the president ratchet up pressure in this context.
The market is 100% sure a rate cut is coming. The Fed chairman has told us to watch for a rate cut. And the president is reminding us that he wants lower rates.
It's a politically savvy strategy. It'll allow Trump to take credit for the coming cut... And any potential economic benefits that follow.
He knows that many Americans are distrustful of the Fed. And with good reason...
Fed rate hikes are one of the best negative predictors we have. This should get your attention...
You see, the Fed uses interest rates like a brake pedal. When the economy is getting too hot, it presses the brakes – and raises interest rates.
When things aren't looking good, the Fed lets off the brakes. That means it lowers interest rates. And that makes it easier for businesses and individuals alike to get loans.
Now, all of this is supposed to be in pursuit of the Fed's "dual mandate." All that means is that the Fed is focused on two primary factors...
They are 1) the employment rate and 2) inflation. And right now, both of those look pretty good.
Inflation is hovering around 2%. And the unemployment rate, as measured by the Fed, is at multidecade lows.
On the surface, the market looks pretty good, too. The S&P 500 Index recently hit new highs. And the trend looks positive.
So, that leaves open a nagging question: Why is the Fed cutting rates if everything is going so well?
Investors are scared stiff of the market...
You don't have to take my word for it.
Morgan Stanley recently downgraded its global stock holdings to "underweight." That's Wall Street speak for "get the heck out." And in case that's not clear enough, here's Morgan Stanley's Chief Cross-Asset Strategist Andrew Sheets to explain the decision...
"The most straightforward reason for the shift is simple – we project poor returns."
Sheets is the guy that oversees Morgan Stanley's global investment strategies. And he thinks future returns will stink.
It seems crazy. The market is hitting new highs, yet a major bank is shouting "we're getting out." But the reality is, there's a laundry basket of reasons why Morgan Stanley might be moving this way.
And a lot of it revolves around uncertainty.
Remember the trade war? It's not the hottest topic in the news right now...
We have the president's "distraction machine" to thank for that. But even though the news has moved on, the trade war lingers.
China and the U.S. just don't see eye-to-eye on a lot of things. And the only thing that's going to bring the trade war to an end is compromise.
That's not something our politicians are great at right now... especially in an election cycle. But fortunately, Trump and China's President Xi Jinping have negotiated a cease-fire.
Time will tell what happens next. It's probably safe to assume that both Trump and Xi want reasonable outcomes. But there's nothing in life that guarantees that. Any number of trivialities could derail the whole thing. We've seen negotiations go off track a few times already...
In a normal cycle, the trade war would be reason enough to be wary of the market. And so, all eyes are on the Fed.
But there's more...
The Iran situation is getting worse, not better...
Simply put, the world is waiting to see if tensions between the U.S. and Iran will lead to armed conflict. This is about nuclear weapons... kind of.
Right now, the problem is more basic. It's about a fundamental lack of trust... And the instability of power that creates.
By pulling out of the nuclear deal, the U.S. has Iran backed into a corner. Now, Iran has few allies. And the nation's hardliners' cries of "we must show them that we will not be pushed around" are starting to sound more reasonable.
That's dangerous. It's dangerous for Iran, the U.S., oil markets, and the world economy.
It's a big, complex situation. And a lot of the potential outcomes could be negative.
In other words, there's a lot of risk floating around out there. And investors are looking for ways to hedge against it.
The answer might be hiding in the price of gold...
Gold has been absolutely soaring!
As measured by the SPDR Gold Shares Fund (GLD), it's up 11% since the beginning of May. And oddly, like the S&P 500 Index, the trend is pointed up.
Not only that, gold has been walloping stocks...
That's the return of gold against the S&P 500 since May. Gold's the clear winner here.
It's not a scenario investors are used to seeing. And it's one that should give you pause.
Gold prices are the literal "gold standard" when it comes to measuring instability and uncertainty. When investors are scared, they move to gold.
Stocks look pretty good right now. But there's lots of uncertainty. And cracks are starting to show in this long bull market.
That has pushed gold to new 52-week highs. This might lead you to think that the gold trade is about to cool off. But history says you'd be wrong.
History has a way of revealing patterns. It doesn't repeat – it rhymes (or so the saying goes). And in the case of gold, it's a testable pattern.
I tested the data back to 1973. The idea is to look at the following year of performance each time gold makes a new high.
The results aren't ambiguous.
After a 52-week high, the typical return from gold is 18.5%. That's three times the normal return.
Gold has been a solid performer since the 1970s. But after each new 52-week high, things get a little crazy.
Now, in the July 19 Digest, Dan Ferris told readers that some of the price movement could be attributed to investors trying to front-run the Fed...
The traditional belief is that Fed rate cuts push asset prices higher. Lower interest rates translate to higher bond prices. That makes bonds less attractive, and riskier assets relatively more attractive. Lower interest rates also make it cheaper to borrow money for anything whatsoever, from leveraged stock market investments to new cars and fancy vacations.
These days, higher asset prices on the back of Fed cuts are viewed as an iron law of finance. The old saying, "Don't fight the Fed," rings in the ears of many investors. (Too many, I'd say.)
By that logic, you're certifiably insane if you bet against Fed rate cuts driving asset prices higher...
And for the most part, I agree.
The certainty of the rate cut leads to a pretty logical conclusion... the investments that normally compete with gold are getting less competitive.
For a more detailed explanation of how this mechanism works, I urge you to read Dan's entire essay. But don't get carried away... There's something bigger here than arbitrage.
Right now, we're at the center of an aging bull market, with lots of uncertainty and a changing Federal Reserve posture.
Fortunately, the path forward is clear...
Stocks are still headed up. And we don't want to step aside early.
Remember, in Melt Up setups like the one we're in now, you don't want to miss the final gains. But this go around, we're being blessed with a double opportunity.
Gold AND stocks are moving up. And we want to make sure we take advantage of both.
Stocks are starting to eke out their final gains. And the market believes the Fed sees weakness on the horizon.
That, combined with a fruit basket of global tensions, is pushing gold up. And ironically, gold is about to get a big boost from the Fed, too.
My boss and colleague Steve Sjuggerud has multiple strategies for taking advantage of the gold trend...
But one of my favorites is Seabridge Gold (SA).
Steve has written a lot about Seabridge in both his True Wealth and True Wealth Opportunities: Commodities publications. In short, a quirk about this business makes it one of the most interesting ways to play the gold boom that I've seen.
You see, Seabridge Gold acts as a "land bank" for gold. It owns millions of ounces of gold in the ground. But it's not mining its major deposit yet.
That makes Seabridge the perfect "call option" on the price of gold. When gold prices rise, Seabridge rises more. And the great thing is, this call option doesn't expire.
So, if you're looking for a way to play the rate cut... the trade war... the Iran conflict... the cracks at the end of the bull market... or just the fact that gold is headed up... I'd recommend you start by taking a look at Seabridge Gold.
You can get instant access to our most in-depth research on Seabridge and all of our other top commodities recommendations with a subscription to True Wealth Opportunities: Commodities. Click here to get started now.
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The mailbag is overflowing with feedback on Dan Ferris' must-read Friday Digest. As always, send your comments, questions, and general concerns to feedback@stansberryresearch.com.
"Friday's Stansberry Digest by Dan Ferris was the best edition I can recall. We all need a dose of common sense far more than the latest stock tip. Well done!" – Paid-up subscriber Dave C.
"Hello Dan, your article [Friday] in the Stansberry Digest should be printed out and taped to the top of all our PCs and laptops. Wonderful article, maybe the best I've read yet in all the Stansberry products, with all due respect to the brilliant authors there at Stansberry. And I go back a ways, as a retired naval officer/aviator and retired aerospace manager.
"If only this wisdom you distilled for us in your excellent article could be taught in our public-school system, and in colleges and universities. You were spot on with the point about separating individuals from the consequences of their actions.
"You picked a perfect example of the criminal class (Warren) who peddle this soma to the masses. But I think in her case you are much too generous regarding her motives. In my opinion, she is both ignorant and evil, like many there in both parties in DC. The public should be reminded often that we are left to our own devices.
"I opened my first brokerage account in 1969 with one of the major firms. It took me about two or three months to realize the truth of the old axiom, that no one cares about your finances like we do ourselves. Thank God I ran across Stansberry several years ago and then became an Alliance member. Again, thanks Dan for the encouraging article, and to all the wonderful staff there at Stansberry. You continue to set the gold standard. Cheers." – Paid-up Stansberry Alliance member Hal C.
"Dan, I don't know you from Adam, but I can tell just by reading your article about 'getting stuck with a needle,' we would get along. You have hit more than one nail on the head here, human psychology, risk, responsibility, the real world and tied it all together well.
"You have probably heard the saying, 'common sense isn't that common,' well that is the case, it seems, with current politics and economic thinking. There are eternal laws that no man or government can circumvent or control and one of them is that sooner or later the debt must be paid.
"I am an efficiency Engineer by trade and have worked with the Federal Government for 20 years. I had a middle level Government Manager tell me once, 'if we (the Government) are doing it, you can bet it is wrong.' The Fed is a prime example of the truth in that statement. Cheers!" – Paid-up subscriber Mike S.
"Dan, your Friday Digest was spot on. It brought my father to mind who was around for the creation of the Federal Reserve in the dead of night. That was a dark event in the spectrum of free men giving themselves over to hopes of ease and safety. We are living in Robert Heinlein's crazy years. Always good to hear your takes on things as an antidote to some of that crazy." – Paid-up Stansberry Alliance member Robert H.
"Dan, that is one of the best Digests Stansberry Research has produced. Our government is too big. Our leaders say whatever they think people want to hear; most words from politicians are lies to further their careers. Most of our citizens are lazy and want the government to do everything for them. Our population needs to wake up before the rest of the world passes us." – Paid-up subscriber Charlie W.
"I'm always glad to read a quote from Harry Browne. I'm 74 years old and was a subscriber to his Harry Browne's Special Reports newsletter for many years. I read all his books, and even have a copy Harry signed for me. He was, among other things, a great communicator. I voted for him for president.
"I believe the best single piece of advice he ever gave us was this: In the financial world, almost nothing turns out as expected. Every time I went against his teachings, I was sorry. Thanks for quoting Mr. Browne." – Paid-up subscriber Jerry F.
"Re: Stansberry Digest 07/26/2019, I'm an 81-year-old with grandchildren entering college and late high school. I think the subject essay is an invaluable tool for them to take with them as they leave the nest. Actually, it should be in the syllabus of a core subject in every high school and college. I learned the lessons the hard way (which didn't kill me), but I think our young folks need to have a foundation in reality, standing on Dr. Ferris' shoulders." – Paid-up subscriber Hebron C.
Regards,
Vic Lederman
Jacksonville, Florida
July 29, 2019