Big drop in gold today after the FOMC announcement. Let’s go to the charts.
The yellow metal is approaching a 5-year low at around $1,050 (actually $1,046.25), which it hit right around this time last year. Tough to see a big bounce back from here with the Fed in tightening mode, a massive stimulus and tax cut expected and the growing expected growth differentials between the U.S. and the rest of the world, and, more importantly, a U.S. dollar in beast mode.
We have no idea, as does anyone else, where gold is headed. Gold could start a new secular bull market tomorrow for all we know. But, given the preponderance of evidence – trend, momentum, and the lack of fundamental drivers – our bet is gold is heading south and at least tests, or takes out, the lows of $1,050 made last December. Who knows, maybe gold becomes a triple digit midget (whoops, not PC) — a $900 handle — by the time The Donald takes the Oath of Office on January 20th.
Why Isn’t Gold Higher?
After years of massive money printing by the central banks, zero and negative interest nominal interest rates, and negative real interest rates for much of this new century, gold should be at $5,000. But it’s not. Now the monetary spigots are being turned off.
It seems gold needs some runaway inflation to get a new bull market jump started, which may be coming, but not just now. Or a bull market sparked by geopolitical risks, which could increase markedly, in a scenario where, say, the new President-elect tries to bully the Chinese on various issues, and Mr. Xi, probably China’s strongest leader since Mao, has to save face. One morning we could wake up and U.S. battleships are squared off with the Chinese navy in the South China Sea. Gold soars! God help us.
Possible? Yes. Probable? No. Not in the next few months before gold’s probable trip south to the Antarctic, however.
Gold Miners GDX
Also look at the gold miners index, GDX. After hitting an all-time low on January 19th of this year at $12.47, it rallied 151 percent into August 2nd, to $31.32. It closed at $19.89 today, 36.5 percent off its August high.
It slightly broke support today and looks like the next stop is at $19.00. Still, GDX is way off its low in January and remains up 45 percent year-t0-date. We really don’t like the GDX here. A break from here back to the lows is a long cold trip to the South Pole.
Dollar Breaking To New Highs
All this, as the Dixie (dollar index) breaks to new 13-year highs and, furthermore, we think that party is just getting started and headed to the twenty year high of 120.
Also, note in the last chart down the page the huge rally in the dollar after the Reagan regime change, which many are making similar comparisons to the incoming Trump Administration. Trump is following the same policy prescription as Reagan — large tax cuts, big increases in military spending, and even one step further, a large infrastructure spend. All this with very little talk of spending cuts.
Given the Reagan policies, the trade weighted dollar index in major currencies rallied over 50 percent from President Reagan’s inauguration until it peaked in early 1985. It took the Plaza Accord – the agreement between Japan, U.K., West Germany, France , and the U.S. to weaken the dollar –to take the final steam out of the U.S. currency.
One major difference, however, between Reagan and Trump is monetary policy. The Fed began to ease or, stop tightening, and interest rates were peaking early in the Reagan administration as Paul Volcker finally broke the back of inflationary expectations. The polar opposite is the case with monetary policy with the incoming Trump Administration. The Fed is just starting to take away the punch bowl and, who knows, they may even be way behind the curve in raising rates. Another boost for the dollar and major headwind for gold.
We could be super wrong in our analysis, folks, so don’ bet the ranch or trade on it.
Stay tuned!. It is going to get very interesting.