Contributed Commentaries
Trump is in Position to Benefit Gold
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
On July 19th, while gold was selling down toward the $1200 region, President Trump publicly criticized the Federal Reserve’s current policy to continue raising interest rates. Gold immediately rose $10, while the over-bought U.S. dollar made an intra-day reversal from its highest point reached since a strong move higher began in mid-April. Trump’s remarks, in an interview with CNBC, were likely directed at pushing the dollar lower to make U.S. goods less expensive and offset some of the damage caused by reciprocal tariffs being proposed by its trading partners.
U. S. Presidents rarely intercede when it comes to the Fed, which is an independent government agency but also one that is ultimately accountable to the public and the Congress. However, the current Fed monetary policy is directly in conflict with the president’s economic goals. Last week in the aforementioned CNBC interview, Trump stated “I don’t like all of this work that we’re putting into the economy and then I see rates going up”. The president has the power to have more control of the Federal Reserve and his broader economic policies argue that he will do so.
The Board of Governors of the Federal Reserve is required to have seven members and it presently has just three. Two of the current governors have already been put into their positions by President Trump and two more have been nominated by the president, which are awaiting confirmation by the Senate. After these two are in place on the Fed’s board, the president will then nominate two more, so it is possible that six of the seven Board members will be instated by Trump.
The Federal Open Market Committee (FOMC) has 12 members and sets the nation’s monetary policy, while seven of the 12 are the members of the Board of Governors. The five additional members are Federal Reserve district bank presidents and one of these, the Fed Bank president in Minneapolis, Neel Kashkari, has already been arguing for no further rate increases. The head of the Fed bank in New York was also nominated by the president, while the other four can only take their positions as district bank presidents if the board in Washington agrees to their hiring.
The rising U.S. dollar has been the catalyst in keeping pressure on the gold price since mid-April and last Thursday’s price action in both gold and the dollar was further evidence of this. The $1200 region is strong support for gold and the worlds reserve currency has reversed from strong resistance at the 95 level on the Cash Settle Index for eight consecutive weeks. Since the dollar has been attempting to rise above this critical resistance area, President Trump’s comments were conveniently timed to weaken the U.S. currency and thus bounce gold from an equally important technical level.
The next FOMC meeting will take place next week on 31 July/01 August and the market has priced in another ¼ point rate increase during the following meeting in late September. Supposedly, there are two more rate increases coming this year. But with President Trump in position to appoint more Fed Governors who may vote for a policy change in sympathy with his economic vision, we could see a rate-hike pause in December.
We could also see more comments from President Trump regarding his dissatisfaction with current Fed policy. Any hint of a more dovish posture by the Fed in the speech, or the press conference which follows the conclusion of the FOMC meeting in September, would weaken the U.S. dollar considerably, thereby providing a much-needed boost in the gold price and its miners.
Meanwhile, gold seasonality, sentiment, and the latest Commitment of Traders report (CoT) are showing levels where major bottoms have been made in the past. Last Friday’s CoT report showed commercial traders reducing their net short positions by roughly 27% at -73,635 contracts, which is the exact level that accompanied the July 2017 low. After bottoming last July, gold rallied from $1204 to $1362 in just 8-weeks. There is strong support at $1200 on a monthly closing basis but we could see this critical level tested as we head into the FOMC meeting next week.
Furthermore, since the February 9th low in the GDX, the relative strength in the miners could also be hinting at a significant bottom being in place soon. Over the past six months, with gold nearly $100 lower, the GDX has remained above critical support at the $21 region and is down only 8% since the major miner ETF was a bit above $23 at $1369 gold in mid-April. Moreover, many of the quality juniors in the complex continue to bifurcate from the sector and a handful are trading at multi-year highs.
Recently, there have been many other quality junior resource stocks being sold by impatient investors, creating opportunities for speculators with cash and patience. It takes a lot of time and effort to find these opportunities and it is best to be on the hunt for them when the gold space is out of favor. When this sector turns, the stock prices in the quality issues can move up quickly. If you require assistance in choosing the best quality juniors to invest, please stop by my website and check out the subscription service at http://juniorminerjunky.com/
