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Is Sideways Up or Down?

Last week I was adamant: gold was butting up against technical and emotional resistance at $1250-$1262 per oz., so to be confident that the spring run still had legs I needed to see the yellow metal break up through that resistance. If gold miners also moved up, erasing some of the lag they’ve shown in gold’s recent move, I would be even more confident.

And if gold failed to break up through resistance, I would consider the spring run done.

So what has gold done? Stayed smack in the middle of the resistance band.

Hence my title: is sideways movement up or down?

The only way to answer is to dive a little deeper.

Take today’s action for example. The day started with a very strong ADP jobs report. ADP always releases its jobs numbers a few days before the official government numbers; they differ only in that ADP counts private sector employees only while the government includes its employees. The expectation was for a disappointment, if for no better reason than that numbers surprised to the upside last month.

Well, expectations were wrong. Companies added 263,000 jobs in March, well above the 185,000 expected. The report also showed a continuing trend away from service positions, with goods-producing firms and construction contributing half the new jobs. The market loved the news: stocks and the dollar gained and gold slid.

Shortly after the ADP report we had the Services PMI number for March, which at 52.8 was slightly lower than expected. News of a less-expansionary-than-expected services sector dampened the employment excitement: stocks and the dollar slowed their gains and gold stopped sliding.

Two hours after that the Federal Reserve released the minutes from its March meeting. Again, I don’t understand why it takes three weeks to put these minutes out, but that’s beside the point. What matters was the committee talking about when and how to start unwinding the central bank’s $4.5-trillion balance sheet.

The balance sheet is massive. The central bank bought its pile of bonds during three rounds of quantitative easing, buying every month for periods of time to fuel the market following the financial crisis. Most of the holdings are Treasuries and mortgage-backed securities.

Importantly, the bank has also been reinvesting the proceeds from these bonds, buying more bonds with the proceeds and thus continuing to grow the account. The first step in unwinding the account would be an end to these reinvestments.

Today’s minutes in no way outlined how, let alone when, the Fed would start this process…but the group did discuss it at length, which is the preamble to making an actual move. The market didn’t respond with a Taper Tantrum (the cute phrase used to describe how markets slid when the Fed ended each phase of QE), but stocks did immediately turn down.

House Speaker Paul Ryan added to downside concerns with comments suggesting that tax reform will take longer to accomplish than the (failed) Obamacare repeal and replace act. As I’ve said many times, expectation of lower taxes has been one of the main market drivers since Trump was elected

As a result of all that gold bounced back, regaining all the $12 it had lost earlier in the session.

Until we get some clarity on big economic questions – whether US markets are topped, whether inflation is ramping, whether the US economy is really growing – moments full of mixed data are going to keep repeating. If enough confused investors turn to gold each time, the yellow metal will have more support than it needs to continue its upward march, whether now or after the summer.

Also, there’s an odd divergence happening: soft indicators like consumer confidence keep rising, but hard economic data keeps coming in weak. (The ADP jobs report was a notable exception.)

The divergence matters. For one, analysts differ on whether to include soft data in their GDP calculations. Those who do, like the New York Federal Reserve Bank, are these days ending up with much stronger GDP estimates than those who do not, like the Atlanta Federal Reserve’s GDP Now trackers or the analysts at Morgan Stanley, who produced the chart below.

As you can see, including soft data into its calculations has the Fed Reserve Bank of New York estimating Q1 GDP at 3%. In sharp contrast, using only hard data has GDP Now and Morgan Stanley expecting 1%. That is a big difference for a quarterly GDP estimate.

How will this difference resolve? Either the hard data will play catch up or the soft data will decline. In my opinion, the latter is more likely. For one, consumer confidence just hit a 196-month high, putting it at levels not seen since 2001.

The cyclicality in this chart is pretty apparent. Patterns are never proof, of course, but they do persist. The underlying reason is that economic cycles just can’t last forever.

So that’s two looks – zoomed in on one day and zoomed out over several months – at essentially the same question: what a mix of data means and how it impacts the markets. And it’s an important question today because, whether you’re looking at a day or a year, the data are very mixed and the interpretations are too.

For gold investors, what matters is that most of these mixed situations can be interpreted as bullish for gold.

Whether the argument is one of strengthening hard data leading to growth and inflation, one of Fed balance sheet sales hurting stock prices, one of a sliding market as Trump optimism fades, one of Euro weakness in the face of the political uncertainty that is Brexit, or almost anything else – they can and are all being interpreted as bullish for gold, as evidenced by gold persistence at current levels.

Yes, it would be great to see a stronger move up, to see gold bust through that 200-day moving average and lay down a solid spring run. I still don’t know if that will happen. Miners have stayed sideways with gold in the last week, not catching up on that missed leverage I discussed last week, so they are not especially bullish. The GLD gold ETF has also been sideways, not providing conclusive data either way.

So we are left with no answer to the initial question – sideways is just sideways, it seems – and needing to wait another week at least to know whether there is fuel left in this spring run. But underneath it all is a swirl of conflicting data in which the market keeps finding reason to be interested in gold.

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