Francisco Blanch, head of global commodities and derivatives research, said “In the short-run, the effects of strong dollar, higher rates dominate. But in the long run, a huge US government budget deficit is pretty positive for gold.”
The tax changes are lowering the revenue base, said Blanch. “That means the Treasury has to borrow more so that puts pressure on rates, which in the short-run has not been good for gold,” he said from Hong Kong. “However, in the long run, it basically begs the question, can this go on for much longer? Can the US borrow its way out of the next downturn and at what cost?”
The US and China announced tariffs on US$200 billion and US$60 billion in each other’s goods last week. President Donald Trump has threatened duties on a further US$267 billion of made-in-China products, and signalled the trade war will not end any time soon, telling Fox News it’s time to take a stand on China.
“Eventually the trade wars are going to come back to bite the US,” said Blanch. “It could take longer, it could take shorter, eventually it’s going to happen, but maybe the Fed acknowledges it sooner, which is what people are going to be looking for in terms of getting more bullish on gold. We know that trade wars are not good for the economy.” Report by South China Morning Post
4. MACRO: Brexit Is Happening
We do not see a compromise in Brexit talks on the horizon. British officials live under the illusion and both sides are standing still. If nothing changes, the UK will exit the EU without a deal on March 29, 2019.
EU law will no longer apply in the UK. The millions of Europeans working in the UK will need to have permission to work. There will be custom duties for goods (for example, the tariff for food imports will increase from zero to 22 percent), disrupting the trade chains. Britain would fall out of EU regulatory bodies for things like air safety, medicine and nuclear material. So if it does not create its own regulations on time, airlines could be grounded, while medicine and isotopes would not be imported. And there could be even a hard border on the island of Ireland.
Moreover, there will be no continuity of financial business as British companies will lose their passports allowing them to sell services and products across the bloc under London’s regulations. It’s difficult to predict all repercussions, but one thing is certain: there will be a lot of uncertainty and temporary disruptions (we wrote “temporary” as there is also life outside the EU and the UK is one of the most developed economies, after all). The exit is likely to be disorderly. The price of gold expressed in British pounds should rise then.
The impact on denominated gold is not so clear, but after the surprising outcome of the referendum, the international price of gold soared. Research by Investing.com
5. SENTIMENT: M&A Is A Very Positive Sign
The recent M&A in the space indicates market bottoms rather than market tops, and it could well kick off more badly needed M&A.
Adrian Day of Adrian Day Asset Management pointed to recent M&A activity in the space as an indication that the market is headed in the right direction. “We are beginning to see a lot of activity in the M&A, and I think that’s a very, very positive sign because people are recognizing the value,” he noted.
The last week and a half has brought a slew of M&A moves in the gold space, including the deal between major miners Barrick Gold (NYSE:ABX) and Randgold Resources (LSE:RRS).
Of course, that doesn’t mean all is well in the gold space, and Day also shared his thoughts on two key problems he sees: misallocation of capital and companies that fail to act counter-cyclically.
Day ended with the following words, “if you’re not [invested in gold], I really, truly think this is a great time to be investing. There’s some super companies out there that are very, very cheap right now, very cheap. [You] just have to be patient.” Research by InvestingNews
6. MACRO: Debt, Debt, Debt
This chart, courtesy IMF and Deutschebank, shows several dozen countries and the expected % Change in Government Debt-to-GDP Ratios for “Advanced” Economies.
Most of the countries listed are expected to reduce this ratio, but the USA is shown here as likely to increase its debt to GDP ratio by 9%. This increase in the level of debt will cause the US dollar to depreciate. Investors are likely to seek gold and silver for protection. Research by Kitco
7. TECHNICAL: A Short Squeeze Is Coming
Usually, gold is considered by traders as a safe haven that rises in times of uncertainties. However, as we can see, the gold market was depreciating despite trade wars tensions, Brexit issues, Turkish lira’s fall, and geopolitical tensions. Investors preferred the US dollar, yen and treasuries over gold. What should traders expect from the gold market if its traditional rules are not valid anymore?
Analysts at the Commerzbank believe that the gold market has good chances to surge and it’s early to say that gold has lost its status as a safe haven. According to Commerzbank, the weakness of gold was caused by the strong USD, the strong US equity market, weak emerging market currencies, and speculative selling. However, the analysts see the end of the USD’s rise. If we remember the situation before the crisis of 2008, gold fell to $700 and the USD rose, however, later the gold price surged to $1,200 by December 2009 and $1,400 at the end of 2010.
According to the COT report, hedge funds and managers keep betting on weak gold despite its recent rise. However, Commerzbank’s analysts see this as a positive signal. As the large speculators hold net-short positions for a long time, the reversal moment should happen soon. The bank predicts that as soon as the market gets a fresh catalyst, traders will close positions and the price will go up. Full story at FXEmpire.com
This chart below, courtesy [email protected], shows the ‘net short’ position of commercial gold dealers has evaporated for the first time in years – perhaps for the first time ever. As a percentage of open interest the number is very bullish at 0.4%.
Meanwhile, this chart courtesy Zerohedge.com shows hedge funds have NEVER been more ‘net short’ gold. Hedge funds are often referred to as the ‘dumb money'. The last time these funds were somewhat short (compared to today), was in December 2015 – see chart). That was when gold moved from $1050 to $1375. Is history about to repeat? Report by Kitco
8. SENTIMENT: Central Banks
The economy is headed in the path of a recession, probably around 2019 or later, according to Jeffrey Christian, Managing Partner of CPM Group.
Christian noted that if investors dig deeper, the economy is already showing signs of cracking.
“If you look at what’s happening with the budget deficit, if you look at what’s happening with interest rates; employment looks really good on the surface but if you dig down underneath the surface data there are issues; industrial production, capital investments look pretty good, but if you dig down underneath them, there are signs of topping out, so I think the economic data is relatively realistic right now, but that people are focusing on the short-term headline data right now as opposed to the economic underlying trends,” he said.
Christian said that while gold may benefit from a recession, it will still take a considerable amount of negative economic data and a loss of interest in risk assets like equities before gold reacts positively.
“We really haven’t seen much negative economic news…and we’re still stuck in that same place. I still think it’s going to take some combination of economic data that causes investors to become more concerned about stocks and more interest in gold again,” Christian told Kitco News on the sidelines of the Denver Gold Forum. Full story at Kitco
10. TECHNICAL: This Leading Precious Metal
Featured above is the Palladium chart. Palladium often leads the precious metals complex.
The upside breakout at the blue arrow is setting a positive example for gold and silver and is confirmed by the supporting indicators. This breakout sets up an initial target at the green arrow. Research by Kitco
