The Maven Letter: April 12, 2017
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
Last week I bemoaned the lack of action, the ever-sideways patterns for gold and the markets.
This week, not so much.
Trump blasted a Syrian air base with 59 missiles and sent an aircraft carrier steaming towards North Korea. This is a man who campaigned on not intervening in world affairs. I point out that discrepancy not to criticize Trump but to highlight why these decisions are so significant: because no one has any clue what to expect from Trump next.
Uncertainty breeds fear. The fear trade boosts gold.
That isn’t what gold did following the missile attack. The gain in red is gold yesterday, after Russia called Trump’s attack an act of aggression against a sovereign nation and accused the US of fabricating evidence blaming the Syrian government for the sarin gas attack.
As if ramping tensions between these two superpowers wasn’t enough, this all happened as the USS Carl Vinson aircraft carrier steamed towards the Korean Peninsula. The specific concern is that Pyongyang’s ballistic missile launches, including a four-rocket salvo last month that North Korea described as practice to hit US bases in Japan, are all in lead-up to a larger nuclear weapons test soon, either on April 15, the anniversary of the birth of Kim Il Sung, or April 25, the celebration of the country’s armed forces.
Having the Vinson in the area might raise more questions than answers. If Kim Jong Un does launch a missile while the US are right there, what then? Would the US try to shoot it down? That would be a very public test of America’s unproven missile defense capabilities (the Aegis combat system); failure would be disastrous. If they did shoot a missile down, how would North Korea respond? Or would the US let the test go ahead (assuming the target is innocuous)? What message would that send?
Again, there is zero clarity around this high-stakes development. There is, in short, zero clarity on anything related to Donald Trump, from actions against Bashar Al Assad or Kim Jong Un to tax reform. With the failure to repeal and reform healthcare team Trump prompted real questions about what this president will be able to accomplish; by firing missiles at Syria he showed that he is even less predictable than anyone thought, which is saying a lot.
So far market response to the week’s developments has been pretty muted. The S&P 500 fell 0.7% on Monday but recovered half that loss before the close and has been sideways since. The dollar has done nothing but bond yields definitely dropped, with US 10-Year Treasury yields falling from 2.39% to 2.265% so far this week.
Do you remember what interest rates were in February, the last reported month? I do: 2.7%.
That level of inflation had already put real rates negative, but the yield drop has amplified the drag, putting real rates at -0.435% right now.
I have said it before and will say it many times again: negative real rates are the fundamental driver for gold. And America is not alone. Real and even nominal rates are negative in several other key places: the European Central Bank’s deposit rate is -0.4%, rates are negative at many Swedish banks, and the Bank of Japan is holding its rate at -0.1%. Those are all before inflation.
Negative rates are very much in play. Gold only acts as a safe haven when it makes sense, when the yellow metal is fundamentally supported, and that is the current situation. Major geopolitical and economic uncertainty has investors looking for safety. The negative rate environment means gold offers exactly that.
OK, let me wrap up my macro talk and get to gold. Gold, of course, did respond to the week’s happenings. And it responded enough to get through those technical barriers I needed to see busted. Most importantly, the price rose up through its 200day moving average, something that has not happened since the US election, and by close today had stayed well above.
The move up was especially interesting after the weekend saw a flood of technical analysts say gold’s spring run was dead. The rationale was that gold moved up late last week on news of the missile attack to break through the 200-dma, but then fell back. Using labels ranging from “false breakout” to “bearish reversal”, they said gold’s failure to hold above its technical barrier proved the run done.
Today’s move goes against all of that. Gold moved up and stayed up.
Now, political gains are not the best. They often reverse in short order. Forced to frame it as a general rule, I would say one shouldn’t buy gold because of a political move. And this move could yet reverse.
However, the move comes in a context that I think makes it much more robust.
For one, gold’s recent gains are not all political. Late today the yellow metal made a second move up:
Today’s move happened when the Wall Street Journal reported on an interview with President Trump in which he (once again) talked down the dollar. In response, the dollar immediately lost 0.5 points. Dollar weakness in itself is good for gold; a president that wants a weaker dollar, something usually attained through inflation, is doubly good.
Trump also backed away from labeling China a currency manipulator, one of his key campaign promises. He said his position changed because China has not been manipulating its currency of late. More likely is that Trump knows he could well need China’s support on North Korea in short order and is extending this as an olive branch.
Whatever the reason, it’s another flip-flip from the president.
It’s been a heck of a week. Syria, Russia, North Korea, a raft of weak economic data from jobs to vehicle sales to wholesale trade. In short, our mixed data environment got sideswiped by a geopolitical train.
Gold’s reaction makes sense. I said last week that mixed economic data keeps being interpreted as good for gold, and this week data averaged on the bad side of mixed, which is even better. Today I reminded of the negative rate environment that the world is very much in and the tenuous nature of the US markets. I also highlighted that Trump’s political moves are not only causing uncertainty –indeed fear – in and of themselves; they are eroding confidence that anyone knows what to expect from this president.
That confidence is not constrained to international affairs; it includes everything, from the promises of tax reform and infrastructure spending that spurred so much economic confidence to the talk of protectionist policies and a Mexican wall that attracted so many supporters.
Wall Street has been in la la land for some time now, with valuations that keep rising because of share buybacks and earnings that are barely rising. That kind of run can continue for a long time, so I am not one to say it has to end just because it’s happening.
However, if the market loses confidence, watch out – even a market that barely responds to a missile attack will run for the exits if that’s what everyone else starts doing.
Gold is up 6.7% in a month, 13% in four months. The technical chart went from bearish on the weekend to bullish today. I still see the summer doldrums ahead, but the spring run might have some good life left in it yet and as of today the doldrums look less forceful than they did a week ago.
Let’s keep watching. My plan to exit some stocks following the spring run has been extended until we get some sign that the run is over. That is not now.