In our regular gold trading alerts, we focus on the short- and medium-term outlook and we rarely discuss the very long-term issues or price targets. The reason is simple – the long-term issues and price targets don’t change often, so usually, there’s little new to say about them. Consequently, it’s been a long time since we last discussed our view on gold’s explosive upside potential. In fact, it’s been so long that those who do not take the time to read our analyses thoroughly and those who have been reading them for only a short while may think that we are bearish on gold in the long run. Or that we’re perma-bears.
The economic situation in Turkey has been a powder keg for months, and it’s finally found a spark. While investors have never truly trusted Turkish President Recep Tayyip Erdogan, he’s shredded his last vestiges of credibility in recent months by appointing his son-in-law as the country’s finance minister and espousing his belief that lower interest rates were needed to fight inflation, the exact opposite of economic orthodoxy (and your humble author would argue, all the empirical evidence of centuries of central banking); indeed, Erdogan recently stated, “interest rates are the mother and father of all evil."
Once again, the market is taking it personally. How many times have come here in the past year and a half playing Lord Rothschild to warn you we are dealing with a similar market from the late 30’s? What happened was I’ve been talking about it a lot longer but Rothschild went public so it gave the rest of us who are awake a lot of credibility. Still, the market went higher.
The crude oil and petroleum markets took a Turkish bath yesterday, but in doing so it may have washed out the bearishness and put in our seasonal low. The moves in the market seemed beyond crazy because at the end of the day the Turkish currency crisis is a much more political than financial crisis. Oil moved on the Organization of the Petroleum Exporting Countries, lowering its demand forecast and fears of a rise in supply, but it was Turkey that cleansed the market.
A bearish American Petroleum Institute (API) report, as well as the continuing drama surrounding Turkey is raising fears of a slowdown in oil demand based upon fears of raising contagion coming out of Turkey. The oil market that tried to mount a major comeback yesterday was thwarted by a risk aversion in the dollar that sunk oil, as well as industrial and precious metals.
The U.S. dollar appreciated versus most major pairs on Friday. The Japanese yen outperformed the greenback as a safe haven, but all other major currencies suffered heavy losses during the week. Tense trade developments between China and the United States and Friday’s drop in the Turkish lira dragged emerging and developed markets lower as US sanctions were doubled.
Investor Warren Buffet famously advised, “Be greedy when people are fearful, and fearful when people are greedy.” Many investors say the safest and most potentially profitable assets to buy are the ones that nobody likes. This is a mistake. Classic cars are negatively correlated to downward moves in the major indexes, as evidenced during the crisis of 2008 to 2011, so performance is driven by a contrarian view. Buy the asset everyone loves, and love the assets you own.
Crude oil prices got slammed on fears surrounding the Turkish economy, ongoing concerns about China, and a big build in crude supply, but really a lot of what is driving the bus is the strong dollar. Not just the traditional inverse relationship that oil has with the dollar, but how this massive up move is impacting oil supply and demand.