-- Published: Friday, 9 November 2018 | Print | Disqus
By David Brady, CFA
It is difficult to provide an update on something that hasn’t moved in months. Other than a spike higher on October 11, Gold has basically done nothing in the past three months. The current range remains 1214-1251. Many investors in the precious metals space have become extremely bullish recently, given the rally from 1167. But there is little reason for it, in my opinion. Nothing that drove the decline from 1369 has changed. So rather than focus on daily moves within the current range, let’s focus on the factors that could break us out of this range.
U.S.-China Trade War
With the midterm elections out of the way, the risk is that the softer tone adopted prior to Tuesday is forgotten, and the situation escalates again. We got our first clue yesterday, when the following headline appeared:
U.S. TO IMPOSE NEW DUTIES ON CHINA ALUM SHEET PRODUCTS: RTRS
As I‘ve said repeatedly, like the Chinese, I expect a ‘protracted war’, which means this is likely to get worse before it gets better. A G20 meeting between Xi and Trump is scheduled for November 30. If we keep getting headlines like this, there may not be a meeting. China has made it crystal clear they won’t negotiate with a knife at their throat. Even if the meeting does happen, I don’t expect anything of substance to come out of it. Both sides are too entrenched in their respective positions.
This increases the likelihood of 25% tariffs on all of China’s exports to the U.S., and in that case, China would likely respond as it has since the trade war began back in March, by devaluing the yuan against the dollar. The critical level for USD/CNY is 7. If it breaks there, it likely shoots higher, perhaps as high as 7.40. Some banks see the risk of 7.80/90. Even if XAU/CNY rises to offset the rise in USD/CNY somewhat, Gold would go lower. In this scenario, key support levels for Gold in dollar terms are 1184, 1160, and 1124.
Alternatively, I could be wrong, and the two countries resolve their differences. Something I highly doubt. But if so, Gold soars. It’s that simple.
My primary scenario for the final low in Gold remains a crash in U.S. stocks, which would force the Fed to reverse policy to prop up the prices of stocks and bonds and sacrifice the dollar in the process. This is why China and Russia, in particular, have been loading up on Gold for years: as a hedge against a collapse in the dollar.
If the dollar were to peak and fall, USD/CNY would likely fall also. This would reduce the U.S. trade deficit by making Chinese exports more expensive in the U.S. and U.S. exports to China cheaper in yuan terms. It would achieve what tariffs have not and would render them redundant, contributing to the end of the trade war. Gold would soar under such circumstances.
Please note that the DXY is not the dollar. It is dominated by the EUR/USD exchange rate, which makes up 60% of the DXY. I expect the dollar to peak and fall against most, if not all, currencies regardless of what the DXY does. For example, it could rise against the CAD (Canadian dollar) if Oil continues to fall, but then peak and dump once the Fed reverses policy and Oil rises again. The same with USD/CNY. DXY is not a true representative of the dollar’s general strength or weakness. It’s possible Gold and the DXY could rise together as USD/CNY falls. In summary, the DXY doesn’t really matter to Gold.
Alternatively, the U.S. Treasury, in coordination with the Fed and other global central banks, may decide to weaken the dollar ahead of time, including against the CNY, sending Gold higher. I seriously doubt this also, as it would likely drive up inflation in the U.S. and therefore push U.S. bond yields even higher. This would blow up U.S. government finances when they’re already under stress.
This is why I still see the risk of lower lows until the Fed reverses policy and USD/CNY peaks and falls. However, we’re talking about heading down to a “final low”. Do you want to wait for another $50-100 lower to buy for potential moves on the upside to $1400-1500 medium term and possibly 5k or 10k in the next 3-5 years?
The problem with this approach from an investment perspective is that central banks across the world are buying or repatriating Gold. China’s policies to promote the yuan in international trade are draining physical Gold from the West. Russia continues to load up also. More countries are joining them, the latest being Poland and Hungary. The point being that the risk you run by waiting to buy physical Gold (or silver) at the absolute low is that there is little physical metal left and premiums soar, making it a lot more expensive to buy than the number on your screen. When major rallies begin in Gold, the smart money has already loaded up and there isn’t much left for the little guy. What is left is expensive.
The point here is that even if we are heading to lower lows, you should have “some” physical Gold and/or Silver (not ETFs) in your possession for the truly historic rally to come, in my opinion. A one ounce silver coin costs you less than $20 these days.
Major central banks are buying, and they’re becoming more numerous by the month. Dedollarization is accelerating globally. There are so many catalysts for a global crash in risk assets today that will likely supercede 1929, and yet the only tool the central banks have to address such a crisis is to print even more paper money. Ignore the short-term noise or a potential drop to lower lows; the latter is just for traders. Take a longer-term approach and follow the smart money. The time to buy at least some precious metals is now; then just sit back and wait. Patience will be rewarded handsomely, in my humble opinion.
David Brady has managed money for over 25 years for major international banks and corporate multinationals both in Europe and the US, with experience in Bonds, Equities, Foreign Exchange, and Commodities
In 2016, he created GlobalProTraders.com, an interactive online community for traders to share their views on financial markets.