Gold and the ‘Cobra Effect’
According to Wikipedia, “The cobra effect occurs when an attempted solution to a problem makes the problem worse, as a type of unintended consequence. The term is used to illustrate the causes of incorrect stimulation in economy and politics.”
The term comes from a story that references an attempt by the British government in India to reduce the number of deadly cobras. They offered a bounty for every dead cobra, which initially reduced the number of venomous snakes in Delhi. However, individuals began to breed cobras for income, and when the government became aware of this canceled the rewards program. This caused those breeding cobras to release the snakes in the wild which had the net result of increasing the population of the venomous snake.
Many analysts, including myself, have been under the belief that the monetary policy of the Federal Reserve and the majority of core central banks globally to attempt to stabilize their economies in light of the global pandemic could well have unintended and detrimental consequences down the road.
Larry McDonald, a New York Times best-selling author and CNBC contributor used this term in a blog for ‘The Bear Traps Report’ where he explained that current monetary policies by global central banks and government stimulus will lead to unintended negative consequences. In essence his point is that the solution could be worse than the problem.
In his blog he wrote that, “We believe we are at the early stage of the biggest cobra effect in the history of economics. As the massive monetary and massive fiscal stimuli (over $15T globally) conjoin to save the economy from a deflationary depression, they will cause instead a hyperinflationary economic collapse.”
Although Larry McDonald wrote this blog at the beginning of the year, it is nonetheless relevant today. With the upcoming virtual Economic Summit and Chairman Powell’s keynote speech, many traders will focus intently to see if Chairman Powell will suggest a more accommodative monetary stance than is currently in place. There is also the belief the Chairman Powell will rebalance the Fed’s target rate for rising inflation.
According to MarketWatch, “Powell is expected to advocate for a so-called asymmetric inflation target, one that allows policy makers to let inflation rise above their traditional annual target of 2%, which could be seen as bullish for gold and other precious metals.”
Concurrently tensions between the United States and China have risen to a new level. It was reported that China had launched missiles which included an ‘aircraft-carrier killer’ into the South China Sea during their recent wargames as a warning to the United States.
Collectively this revitalized the bullish market sentiment in gold and silver which had been absent as both precious metals have been trading under pressure for the last week. As of 4:30 PM EDT, gold futures basis the most active December 2020 contract is currently up $39.90 (+1.97%) and fixed at $1961. Silver futures gained approximately $1.26 in trading today (+4.80%) and are fixed at $27.535.
Wishing you as always, good trading,
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Gold Forecast: Proper Action
This morning we sent out a Trade Alert to;
Buy December gold at the market (current = $1956 - 57) Stop @ $1898
Buy December Silver at the market (current = 27.39) stop @ 25.95
Buy Forex gold at the market (current = $1948.55) Stop @ 1899
Maintain long December gold @ $1956.50. Maintain stop @ $1898.
Maintain long December silver @ $27.39. Maintain stop @ $22.98.
Maintain long forex gold @ $1948.55. Maintain stop @ $1899.
Maintain GLD @ $183.57. Maintain stop @ $178.66.
Maintain SLV @ $25.10. Maintain stop @ $22.98.
Trades we Closed on August 19th
Long September silver at $26.68. Our stop was hit @ $26.87 for a profit of $1000 per contract.
Long December Gold at $1955.50. Our stop was hit @ $1979 for a profit of $2350 per contract
Long Forex Gold at $1947. Our stop was hit @ $1967,52 for a profit of $20.52 per Ounce
Trades we Closed on August 11th
Long September silver at $24.40. Our stop was hit @ $25.99 for a profit of $7950 per contract
Bought GLD @ $166.74. Our stop was hit @ $$183.00 for a profit of $16.87 per share.
Bought SLV @ $18.00 Our stop was hit @ $23.80 for a profit of $5.80 per share.
Trades We Closed on August 7th
NUGT – we sold all shares and took profits of $33.19 per share
Long December gold at $1997, we covered the trade @ $2035 for a profit of $3800 per contract
Long Forex gold at $1977, we covered the trade @ $2017 for a profit of $40.00 per ounce
Gold Market Forecast
With the most important economic event of the summer beginning tomorrow all eyes will focus upon the virtual Economic Summit, and specifically to Fed Chairman Jerome Powell’s keynote speech which will be delivered at 9 AM Eastern standard Time tomorrow morning. That being said the rebalancing of the target inflation rate is expected to be amongst the major topics he covers during his speech. Factoring this new easing of monetary policy by the Federal Reserve is personally responsible for today’s $40 gain in gold, as over a 4% gain and silver.
As far as the launching of missiles by China, this event could be a “one and done”, especially since the two countries have been trying to resolve the current trade dispute. However collectively these events could take both gold and silver substantially higher. On tomorrow’s video report we will cover events that occurred at the economic summit as well as talk about our exit strategy for our current trade.