Rejoice: A New Gold Bull Has Been Born
Jason Simpkins

The Fed Isn't Raising Rates

Gold is off to its best start to a year since 1980, up about 10%.

Why?

Because investors are simply catching on to the fact that the Fed's empty promises of a 2015 rate hike are just that.

Indeed, the ECB's decision to launch its aggressive 1 trillion euro quantitative easing program has all but ensured the Fed won't raise rates.

And gold is roaring back as a result.

The Race to the Bottom

For the past year, the world's biggest economic powers, from Europe to Asia, have been engaged in a full-blown currency war.

It actually started last June, when the ECB took the unprecedented step of turning its interest rates negative. It started buying up covered bonds and bundled bank loans, too.

But that wasn't enough. Deflation and non-existent growth persisted.

So, yesterday, the ECB went nuclear with a $1.2 trillion QE program.

Among other things, this is a blatant attempt to devalue the euro — the same way the Fed devalued the dollar.

In fact, the currency suffered its biggest daily fall in over three years yesterday.

But here's the thing: It's not just Europe.

Japan is in a similar position. It's increasing its monetary base by $674 billion each year.

Even China has gotten in on the game. In November, Beijing announced its first interest rate cut in two years. And the country still recored its weakest annual expansion in 25 years.

Basically, every major economy outside the U.S. is loosening monetary policy and devaluing its currency.

QE was prematurely pronounced dead.

The result?

A stronger dollar.

The dollar is up 18% against the euro over the past year. It's up about 17% against the yen in that time.

In all, the Dollar Index, which measures the greenback against a basket of currencies, is up 15% over the past year.

Now, with the Eurozone's latest decision, it's poised to strengthen even further.

And that will mean only one thing if the Fed doesn't act: Deflation.

The Dollar Dies, or Else...

U.S. consumer prices had their biggest monthly fall in six years in December, with the CPI slipping 0.4%. That's the biggest price drop since the Great Recession.

In fact, for the whole year, consumer prices rose just 0.8%. That's well below the Fed's long-held 2% target.

You do remember the 2% target don't you?

The Fed certainly does...

From its December statement: “When the Committee decides to begin to remove policy accommodation [read: raise interest rates], it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2%.”

In that same statement the Fed said it “expects inflation to rise gradually toward 2% as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate.”

That's pretty generous expectation, in my opinion. Headline unemployment was 5.6% in December. How much lower does the Fed expect it to fall from there?

And just how 'transitory' will low energy prices be? How quickly will they 'dissipate'?

Some analysts are predicting oil will fall to $30 per barrel in the next few months. And even the ones that believe crude will recover don't see it bouncing back to $100 per barrel overnight.

Natural gas and coal prices aren't going anywhere, either.

The truth is, we're not likely to see a significant jump in energy prices. At least, not this year.

And now, on top of all that, we've got Europe unveiling a quantitative easing program that will strengthen the dollar even further.

Like I said, year-over-year inflation was just 0.8% in December. The January number is going to be even lower than that. And if it's not negative by February, it will be by springtime.

The FOMC meets next Wednesday. Do you honestly think it's even going to telegraph a rate hike when the ECB is printing 1 trillion euros?

Do you think things are going to be any better when it meets in March? Not when oil prices have been crippled at $40 per barrel and every other major currency is in an established freefall against the dollar.

So what's Janet Yellen going to do? Raise rates and throw gasoline on the deflation fire?

Not likely. And that's what brings me back to gold.

The Golden Calf

Gold took a beating last year, mostly because the market was pricing in an imminent rate hike.

But increasingly, people are coming to realize that rate hike isn't coming.

That's why gold is already up 10% this month. They're preparing for the inevitable Fed backtrack.

This is nothing new, of course. We've seen it all before.

Way back in 2012, Ben Bernanke said the Fed would start raising interest rates when unemployment fell to 6.5% or below.

Well, the headline unemployment has been below 6.5% since last April when it clocked in at 6.3%.

As bond purchases wrapped up last fall, conventional wisdom was that the Fed would raise rates in the spring. And by the end of 2014 that'd been pushed back to later this year.

Now that's in jeopardy too.

The bottom line in all of this is that gold is going to go higher.

While the euro was plunging yesterday, gold prices settled above $1,300 per ounce for the first time in five months

I'd say it will go to at least $1,400 per ounce by the end of the year, maybe even $1,500 per ounce.

Get paid,

Jason Simpkins

@OCSimpkins on Twitter

Jason Simpkins is a seven-year veteran of the financial publishing industry, where he's served as a reporter, analyst, investment strategist and prognosticator. He's written more than 1,000 articles pertaining to personal finance and macroeconomics. Simpkins also served as the chief investment analyst for a trading service that focused exclusively on high-flying energy stocks. For more on Jason, check out his editor's page. 

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