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.
Adam Jagiellowicz is co-founder of Online Finance Academy. He teaches the Master in Trading Course and develops trading algorithms for forex and commodity markets.
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