Perhaps there are people shaking their heads wondering why gold dropped today, not by a huge amount, but enough to look like perhaps a retracement from recent gains was taking shape. Consider its recent trajectory: only up. We mentioned in a recent post to private clients that we were in the FOMO zone (fear of missing out) and that would inevitably lead to rapid pullbacks. If you are long term investor, as you should be, this is an opportune time to wait for the next basing action. 

So, why did gold go down today? Quite simply, the markets of late have been all about the trade deal with China. So news comes out on the wire about renewing trade talks in October, combined with a positive jobs report, well, this is all very bullish for the USA, and by extension, the US dollar. Traditionally, whatever is good for the USD is bad for gold: the inverse correlation between these two is well-established.

To understand the importance of this trade deal one need look no further than the base metals markets today. After the past few months of tailspinning they received a good boost today. This is not just a deadcat bounce. The base metals are way oversold and should a trade deal materialize we will see them go back up much further yet. But why many will ask.

First, let us dispel any erroneous ideas about the Trump Plan. Believe it or not, he has a plan, and although he may appear to be a buffon, and perhaps he is, he knows American voters far better than the DNC. IN fact, he will quite likely win the coming election. The DNC will not allow a left leaning democrat like Sanders to run, and ditto for a peace candidate like Tulsi Gabbard. In all likelihood, it will be a contest between Warren and Biden, and if Biden wins the nomination, he will lose to Trump. One should not pay too much attention to the press. Travel through the heartland of America and speak with everyone, not just white Christians, you will see Trump has broad support, and this includes latinos and women.

So imagine now the following: a trade deal materializes (liekly since Trump is planning for this to coincide with the election) and interest rates maintain their current level. Companies will reinvest in capex projects and we may very well see new and significant jobs growth in the first half of 2020, conveniently, just before the next election in November. 

So, getting back to our investment strategy. Should we short gold and wait for lower prices ahead to get back on? I really don't think so. The macro situation continues to support gold over the long run. Should we invest in base metals stocks and copper at current prices? I would say yes. They are oversold and the price of lumber and copper suggest that there is still adequate demand in the housing markets. Should we buy more gold as it declines? I would wait. There are 2 solid technical levels below us ($1450, $1360). We would like to see a test of them. If we see that, definitely accumulate more gold, especially gold stocks. 

Finally, does this scenario above mean that we are retracting our belief that the economy is headed for  tough times? Absolutely not. The economy is impossible to predict, primarily because we our reactions to news and statistics prevents such predicted outcomes from occurring. Europe and much of the world remain in economic limbo, and it appears the global economy is resembling Japan (circa 1990) more and more. That means we can expect a future of perma-low interest rates, intentional weakening of currencies to maintain trade advantages and a continual destruction of buying power. In such a situation, one needs to be long gold and other PMs, especially platinum.  
 

.Here is some key data to pay attention to, especially if you are still very long stocks and believe the last couple of weeks is just another of many more buying opportunities to come. As well, in this post we will look at some ideas which may look like a screaming buy in 2 years time. (One needs to be patient for the big big money move!)

First of all, recent reports out of Asia confirm that many people are paying (and receiving) with credit, IOUs and the like, just to keep afloat. Trump's tariffs are having the expected effect curtailing growth in the Asian market. This has killed bellwether stocks such as Samsung. At the same time, we see East Europe is supplying more of what China once offered far more cheaply. No doubt, a trade war is in effect and the result of such trade wars lead to currency debasement.

All this is good (slash that) great for the gold market and eventually will be for high yielding stocks. So far, many of these high yielding stocks have retraced significantly with the general market. Ditto for energy stocks. For those who took advantage of our advice on going long gold and platinum 2 months ago, we would suggest to continue to buy on retracements; this bull trend is far from over. A global governments race to zero interest rates a storm is brewing. 

We would also suggest that you consider shorting high yield debt and instead go long certain high yielding equities, such as pipeline partnerships (AMLP), as well as select oil stocks. We realize this last idea is very much a contrarian trade, but how often is it that you find oil companies trading at about 4 times cash flow (half of what is typical), below book value, providing good dividends and which are still profitable? If WTI stays below the $50 handle, which it no doubt will if trade conditions deteriorate, producers will cut back on production. Currently, there is a glut of production, so it is only a matter of time before the pendulum swings back. Right now though, things are looking pretty cheap. 

Shorting stocks is always a bit tricky, especially when lousy companies with little or no prospect of ever turning a profit continue to attract capital. A classic case would be UBER which today reported a loss of over 5 billion on revenues of slightly more than 3 billion. Yes, that's correct. These numbers make no sense even if one considers the majority of that loss was due to incentives given to original stakeholders. Imagine you're a 7 year old who opens a lemonade stand and you sell it for 30 cents a glass, while it costs you 50 cents to make. Really, it's not much different from that. And if your argument is that you are trying to capture market share with your brand and your app, think again. The fact that this company and others like it are even able to attract capital is absurd in historical context. Here is a stock with no moat around it,  no potential for any significant profit margins, and a lousy corporate governance. There is far more money than brains involved in the market now, perhaps because it's not real money, it's just debt. All this is very reminiscent of 1999. Hold onto your hats. One can't predict the future of course, but we would suggest staying nimble, stay in gold and cash, and wait for greater opportunities ahead. Remember, nobody is forcing you to make a trade. Buy when there is blood in the streets!

Gold responds to the opportunity cost of money, more than anything. When the cost of holding gold is minimal, as it is now, this is what you should expect. It would be strange to see these yields bounce back quickly. If one considers that the global economy is not in a recession and Central Banks are talking lower rates, then this becomes a serious concern. 

What tools will Central Banks have at their disposal if we do enter a recession, or if geopolitical risk and tariffs begin to affect the economy significantly? It seems the market is pricing all that in right now, in which case we might be due for a relief rally (or retracement on bonds and gold). Longer term however, it is clear the market has little confidence in either the Euro or The USD, which becomes a strong case for holding gold.

Will the USD remain weak over the next year? That is far more difficult to call. Gold has had a good run the past few weeks, but it's come too far too fast. At the same time, the critical level of previous resistance at $1350 USD has been breached. Any move back to or near that level should be considered an opportunity to go long again. 

First a little background: in the wake of the financial crisis in 2008-2009, the ECB had been compelled to cut interest rates to negative; they currently sit at -0.4 %. The intent of negative rates is to encourage institutions to lend money rather than park it at the ECB. If euro banks aren’t lending, then they are forced to pay the ECB to sit on their cash, or take greater risks in their lending practices. This has been hurting EU bank profits for quite some time, as the chart below indicates. 
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Well, some relief may be on the way for EU banks, but this doesn’t necessarily bode well for anyone who is long the EURO. ​