What's bad news for crude is great news for gold

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In his Jackson Hole speech today, Jerome Powell failed to deliver a "whatever it takes" moment to hit the Fed's inflation target. Instead here is what he said:

We are evaluating the pros and cons of strategies that aim to reverse past misses of our inflation objective.

That is clearly not going to cut it with markets, particularly when the Chinese currency is tumbling which will only serve to push inflation further away from the Fed's 2% target. In terms of investing implications, the drop in crude oil today seems to be confirming our fear that the global economy cannot weather both the China-US trade war and a go-slow Fed approach to monetary policy. We will have to give it another day or two to see if this is more than just a knee-jerk reaction. At this point, what is bad for oil is great for gold as we are left with a scenario where investors are unsure of what the next steps will be for the Fed.

As we wrote in our August Top 20 Gold Stock Report:

The risk for gold is not that the Fed chairman continues to confuse the markets, but that the delivers a "whatever it takes moment" which convinces markets the Fed is going to stimulate inflation to consistently reach its inflation target. That would push up long-term bond yields and could lead to some profit-taking in gold in the short-term. Ultimately, gold should get its legs under such a scenario as it would imply deeper short-term rate cuts. But immediately, some traders could panic out of gold as long-term bond yields rise.

 

Realistically, we expect the risk of a what-ever-it-takes moment from Powell to be low. The base case is more of the same which would be gold bullish.

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With gold likely to remain in its bull market, at this stage we believe it will benefit producers such as New Gold (NGD) who are cash-flow challenged as the higher gold price should help bail them out. I bought some New Gold today as it has moved back up to its bought deal offering price of $1.60. SSR Mining (SSRM) which we wrote about today in our morning report is also moving higher. However, it might take a silver move above $17.50 before we could see an improvement in the stock's INK Edge Outlook.

This post is based on an article that originally appeared on INKResearch.com.

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