From the Maven Letter, March 22
Gold is up 4% in a week, performing exactly as I thought it would following the rate hike. The reaction in equities has also been interesting: miners showed extreme leverage on the first day of the move, multiplying gold’s gains 4- to 6-fold, but in the days since have provided no leverage at all (as per the GDX and GDXJ, at least).
The silver ratio also remains intriguing. Silver gained alongside gold on the day of the hike but has ceded ground since, putting the gold:silver ratio in positive territory. It’s commonly argued that silver outperforms gold in an established bull market for precious metals, which is what happened in early 2016. But the ratio has failed to establish a negative slope for 8 months now.
Of course, a few days does not a trend make, but the combination of a lack of leverage from gold stocks over gold and silver not outperforming the yellow metal does give pause. Is the spring run happening?
There are a couple factors to consider here. One is that the price of gold is up against some resistance. The market has shown strong support for the yellow metal at $1,200 per oz., rebuffing its slides at that mark several times, but it has also resisted lifting gold above $1,250 per oz. several times since this bull market began.
Guess what gold did today? It opened at $1,245, climbed just above $1,250, and then gave that ground back.
You can make all kinds of arguments around the move – it wasn’t likely to gain strongly today after adding 1.4% yesterday, the terror attack in London sparked safe haven buying, Trump’s waning popularity is starting to threaten economic confidence, the US dollar has been losing ground – and they all have merit.
That said, as much as I am not a chart-ist I do see significance in clear resistance levels like we currently have at $1,250 per oz.
Resistance levels like this occur at round numbers like $1,250 per oz. because the market is an emotional being and people get sentimental about round numbers. From a more technical perspective, gold’s 200-day moving average is currently at $1,262 per oz., pretty close to that arbitrary but existent $1,250 level.
Whichever you prefer, both represent the next hurdle for gold. If the price clear those levels, the pathway to define a new bull market high is a lot easier, at least from a technical perspective.
And of course a new bull market high is the goal. The fundamental definition of a bull market is higher highs and higher lows. The naysayers argue this bull market is not established until gold bests its mid-2016 high of $1,366. While I am no naysayer, I agree with the sentiment. It doesn’t have to happen tomorrow, and I think it likely to happen before the end of the year, but it has to happen before the price falls back below $1,125 for the higher highs, higher lows pattern to persist.
One factor working in gold’s favour at the moment is the US dollar. To all those who say rate hikes help the dollar: not so much.
Why the slide? The common foci are US-based, but I would take a look across the Atlantic.
The Euro is rising. It’s not dramatic, but I think the failure of the far right in the Netherlands is easing concerns that Europe as a whole is on the brink of massive political upheaval. The big question is still France, but the Dutch rejecting Wilders is perhaps a foreshadowing of what will happen in France and that is helping the Euro reflect Europe’s actual economic reality, which is positive progress.
This all matters for the US dollar because the Euro makes up more than half of the Dollar Index, which is why those two charts above are such opposites. If the Euro continues to strengthen while concerns about America under Trump rise, the dollar will lose and that will help gold.
When I say “concerns about America under Trump rise,” I mean concerns about where he will focus and what he will be able to accomplish. The current key example is his effort to repeal Obamacare, which is not going smoothly. An administration hung up on one issue is an administration not advancing other issues, like tax reform and infrastructure spending. And the market is only going to hold onto optimism over these promised planks for so long.
So is the spring run happening? I think so. The spring is never gold’s strongest season, so you can’t expect the spring run to be big and bold, but the necessary parts are in place even if a few things, like more consistent leverage from gold miners and silver strengthening over gold, would improve it.