Post Jackson Hole uncertainty to eventually support gold stocks

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An excerpt from the Market INK distributed to Canadian Insider Club members and INK Research subscribers August 29th.

Uncertainty is the clear standout image from Yellen's Friday speech as depicted in the megaphone-like chart (Figure 1) she provided showing the confidence range of policymaker Fed Funds forecasts over the next two years. The range appears to span from 0.125% to 4.5%, with 0.125% being the lower bound cut-off (editor's note: the Fed picked the yellow colour for the chart). While the Fed chair did not hand out diagrams for other forecasts such as inflation, one can only assume similar blow-out ranges would also be the story.

The level of uncertainty is likely to be a tailwind that helps the gold market over the next few years, countering the short-term headwinds of lower inflation and possibly higher short-term rates. For gold stock investors, the yield curve may provide the best clue as to whether the gold bull market remains intact. If the yield curve fails to modestly steepen on the back of bullish Fed rate chatter, it will be signalling a potential economic slowdown that will eventually have to be countered by the Fed with more easing, asset purchases (which could be expanded beyond government debt), and probably more government spending.

Indeed, the INK Gold Indicator moved back above 70% on Friday for the first time since July 7th. Gold stocks are currently in a correction, with the S&P/TSX Gold Composite down about 16% from its recent peak. Since we are still in the seasonally weak period for gold, continued volatility and testing on the down side should be par for the course particularly as we head into the US jobs report on Friday. The Fed has essentially backed itself into a corner, implying that it will raise rates in September if the report is strong. The risk of that happening should shake out some short-term gold stock speculators, if it has not already.

In contrast to the immediate challenges faced by gold in a perceived low inflation-higher rate environment, Technology could be seen as a relative winner. 

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