Thursday, August 25, 2016

IT'S ALL DOWN TO YELLEN'S SPEECH ON FRIDAY

It's now the options expiry period for gold and silver and the usual suspects come into full play to hammer both the precious metals. Pressure will last till this Friday until Yellen speaks.

Miners have fallen about 20% from their peak in this week alone so any further pull back would be ideal to enter.

If Yellen hinted that the Fed will pull the trigger to raise interest rate in September then gold and silver could fall further as an immediate reaction. But like what happened in December 2015, gold and silver recovered to post some of the best gains in the first 6 months of 2016. This is because any increase in interest rate will destroy the highly indebted shale oil companies, as well as other companies which have borrowed excessively to buy back shares. On top of that, funding the US government will become even more expensive and we can expect more US Treasuries to be sold. While US$ might strengthen immediately, in the long run higher the debt, weaker the US$.

In the 1970s to 1980 when interest rates were hovering at 15% gold went up by 325%. So gold is an excellent hedge against inflation and hyperinflation.

If Yellen is dovish then expect US$ to weaken and gold and silver will rise. This will be the strongest indicator that all is not well with the US economy.

Next week China will host the G20 meeting. There is an indication that there will be some discussions on the SDR and how to widen its adoption in the global market. Any positive development on the SDR could be bearish on the US$ as this would translate as a curb against US$ domination in world trade.

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