Factors that affect JNUG & how they affect its purchase. It looks like the time has finally come for everyone to make a profit, a very nice profit, using JNUG as a leveraged way to multiply a rising gold price, " if " gold starts rising. And it looks like there is a catalyst ready to send it upward. Here is how you can evaluate it Sunday evening and Monday morning.
Prior to the previous two rate hikes in December 2015 and then 2016, the Fed telegraphed that they were finally, really, going to raise rates, and since people were convinced that the Fed was going to raise rates, gold fell going into the rate hikes. Gold fell because the rate hikes would increase interest rates and it was believed that people would then want to sell their gold and buy bonds, because bonds would now have higher interest rates, and therefore be more attractive than gold that just sits there and doesn't earn any interest. But then, instead of continuing to fall after the rate hikes went into effect, both times the price of gold turned around and shot upwards.
The reason was, because then, and as forecasted for this coming rate hike, rates were only raised a minuscule 25 basis points. Because of that, the real returns on rates were negative in relation to inflation. The prevailing certificate of deposit rates, then and now, are well below 2%, (unless you buy long term CD's), and even though inflation is low, it is higher than the CD rate. That meant that certificate of deposit rates, even if they went up 25 basis points, similar to the Fed's increase, would still be less than the rate of inflation. Therefore, you would be losing money, instead of earning money, if you bought a Certificate of Deposit. Even though gold doesn't earn any interest, you would actually come out ahead by owning gold, because you would not be losing money. Once people saw that the Fed only raised rates 25 basis points, they realized that people would not be switching their money out of gold, and that therefore there was no reason to think that gold selling was going to continue, and with that realization the price of gold stopped falling, and instead, started climbing.
The Fed Funds Rate at this time is 0.75. It is the interest rate which banks lend money to each other, usually on an overnight basis. Like the federal discount rate, the federal funds rate is used to control the supply of available funds and hence, inflation and other interest rates. Raising the rate makes it more expensive to borrow. However, raising it only 25 basis points, which is 0.25%, (one basis point = 0.01%) would just bring the Fed Funds Rate to 1%, which is still very low.
You might say that the Federal Reserve has said that they are going to raise rates several times this year, and therefore CD's may end up with an interest rate that is higher than inflation, which would put downward pressure on gold. However, it is starting to look like the Fed may not be able to continue to raise rates. Bonds, such as the 1 year, 10 year and 30 year bonds have been climbing, even without the Fed doing anything, because inflation is starting to rise. Also of interest about inflation, people tend to buy gold as an insurance against inflation. For quite awhile now, people have been worried about deflation, but that seems to no longer be in the cards. Even though the government says inflation is subdued, prices of real items that directly affect people, such as food prices and rent, are rising. And as inflation rises, so do interest rates. This will have a deadly effect for government. We have a huge and growing government debt. So far the government has been able to manage it because interest rates are so low that the government can afford to make the interest payments on the debt. But if interest rates go up just a few points, the payments on the debt would be hard to make. Therefore, the Fed does not want interest rates to go too high. Because interest rates are starting to climb by themselves, the Fed will not to add to the problem by raising them even further, and so they will hold off on doing any more rate hikes. Once people realize this, it will tend to strengthen the price of gold.
Continuing to raise the Fed Funds Rate would result in a measurable increase in borrowing costs for consumers and businesses and this could make us go into a recession. Even though some reported statistics indicate that the economy is picking up, other statistics actually indicate that it may be weakening. Housing and car sales may be starting to decline, and wages only went up 0.2%. It is wages that fuel the economy. If people are not making money, they are not going to spend it.
And that 0.2% increase in wages, of course, only applies to people that are working. The government reported that the unemployment rate, which is known as "U-3" was only 4.7%, but actual, unfudged unemployment, is a lot worse. The government also publishes the “U-6” calculation which includes part-timers who want to work full time, along with people who gave up looking for work within the last year, even though they still want to work, and that number is 9.2%. And what about the people who gave up looking for work over a year ago, but still want to work? That used to be included in the unemployment rate when Reagan was president, but it made the unemployment numbers look bad, and so that was dropped. And after awhile the "U-6" figure was also dropped. If the recent unemployment was reported similar to way it was in the Reagan years, it would be 22.7%, meaning that almost 1/4 of the people in the work force are unemployed.
This means that our economy could be on very shaky grounds if wages don't rebound stronger. And they might not if interest rates go up, because this will increase the cost of borrowing for businesses that need money for expansion, or for purchasing needed supplies, and therefore the owners of the businesses would have trouble raising wages. In addition to that, higher borrowing costs would make it difficult for people buy a house, or even a car, and that would hurt all the related industries that supply parts and equipment to those industries. This could really hurt the economy and, in return, wages. People aren't stupid. They realize this, and when people are nervous, one of the things they may do to try to financially protect themselves from uncertain times, is buy gold.
Another thing that can make people nervous is unstable world events, and there are a lot of them on the horizon. It increasingly looks like the European Union is going to fall apart because people are mad at such things as stagnant economies and that too many Muslim immigrants are putting an even increasing burden on their countries resources. And then there is Russian aggression against its neighbors, plus China's growing aggressiveness in the South Seas. Add to this, North Korea and Iran with their increasing nuclear threat, plus you have Saudi Arabia fighting its neighbor Yemen, and down the line, possibly Iran. So you have a number of world wide situations that can, literally, blow up in your face.
All of this puts an upward bias on the price of gold, and if the Fed, again, only raises rates 0.25%, gold could turn around and take off. Since people, including the major institutions that trade gold, are aware that rates will most likely only be raised by 25 basis points, gold could start rising even before the Fed meets Tuesday and Wednesday. In fact, gold turned around a bit Friday and spent the day edging upward.
Gold starts trading at 4PM Eastern time on Sunday. If it starts trending upward, especially going into the stock markets opening on Monday, then JNUG could start climbing. How fast it goes up would depend on how fast gold was climbing. But, since JNUG is such a leveraged stock, if gold slows, or even stalls out, then JNUG could actually start falling, so keep an eye on how gold is doing.
How high can JNUG advance? One way to estimate how high JNUG can go, is to use Bollinger Bands®. Bollinger Bands® were a tool invented by John Bollinger, an acknowledged famous stock technician way back in the 1980s, and because they are so useful and effective, they are still used today. Bollinger Bands® are volatility bands placed above and below the moving average of a stock, or other financial entity. Volatility is based on the standard deviation, which changes as volatility increases and decreases. So Bollinger Bands® take into account, not only the moving average of a stock, but also its volatility. Bollinger Bands® are especially effective when there is a wide distance between the upper and lower band, which is where they are now with JNUG. When a stock price starts to recover, it tends to go back towards the upper band, and if the momentum and fundamentals are strong, it can continue on past the present range of the upper band. The JNUG lower band is right around Thursdays prices, and the upper band is in the $14.50 range, so that is a possible target. Even if it does not reach $14.50, in the recent upsurge in the priceof gold, JNUG reached the $12 range, which would be a price target if gold has a firm up move from here. But if gold surges upward, then JNUG might move towards the high it reached during the first half of 2016 when gold was surging upward, and that price was $30.
Gold may not rise, before or after, the Fed raises rates, but eventually gold will rise. HOWEVER, JNUG is going to have a 1 for 4 reverse stock split on May 1st. It's price will rise when it has a reverse stock split. Supposedly, and mathematically, its total worth will not change. You will have fewer shares, but they will be higher than they were before the split. The big problem, is that people will be used to the previous smaller number. And if gold is still not doing anything, the price of JNUG shares will fall back to the previous price, or even lower. It that case, you will most likely never make your money back. Since this is a well known phenomenon, JNUG will probably start falling well before May 1st.
If gold doesn't start climbing this week, it might be a good idea to sell its shares if you have any. For people that bought at $12, JNUG is down about 50%. That hurts, but you can recover from a 50% loss. If you wait until you have lost 90%, then you will have really done yourself a disservice. Hopefully gold starts going back, but if not, if it was me, I would sell.
I tried posting this Sunday morning, but the site was down. However, it still has relavent material.