-- Published: Friday, 7 December 2018 | Print | Disqus
By David Brady, CFA
Until the arrest of Huawei’s CFO in Canada at the request of the U.S., I was becoming more neutral to bullish on Gold. The G20 meeting was a complete waste of time in that nothing really changed. There was no agreement on the substantive issues, and certainly not in writing.
However, the Chinese followed up the meeting by confirming the 90-day deadline to meet commitments they made. They also announced their intention to buy agricultural products from the United States (including the precious soybeans and LNG), thereby reducing their trade surplus with the U.S. In addition, they have already been taking steps to address IP theft within China.
This is clearly an effort to appease the U.S. and mitigate the risk of 25%+ tariffs by delaying them indefinitely. Although the core demands of the United States have not been met (and never will be), these actions were taken to get the U.S. to agree to a further delay at the end of the 90-day period, upon agreement to further commitments from the Chinese. Then the Chinese repeat what they’re doing now and meet those commitments they can concede to, while still refusing to agree to the United States’ primary demands for significant structural reforms, which include:
· Ending the policy of forced technology transfers
· Ending state subsidies for strategic Made in China industries
· Abandoning altogether the Made in China 2025 strategic plan, which includes increasing the Chinese-domestic content of core materials to 40% by 2020 and 70% by 2025.
All of which China sees as an American strategy to prevent its rise as a global power. China cannot agree to such changes, as it would undermine the country’s reputation, the Communist party’s authority, and the structure of the domestic economy. Simply put, President Xi is absolutely not going to lose face by allowing the U.S. to dictate China’s domestic policies.
Through the process of appeasement, though, China delays the imposition of additional tariffs. China is clearly playing for time. Time for what? From the beginning, China’s strategy to end the war was either a backlash from businesses and consumers in the U.S. (due to the increased cost of Chinese products) or a crippling U.S. stock market crash, thereby forcing the U.S. to back off on their demands. Time allows for one or both of these to occur.
Getting back to Gold. Its price in dollars is directly connected to the USD/CNY exchange rate. The higher the rate, the lower the price of Gold in dollar terms, and vice-versa. If China’s plan was to appease the U.S., then they were likely to strengthen the yuan, meaning a lower USD/CNY exchange rate. Something the U.S. has wanted all along. This makes U.S. exports to China cheaper and Chinese exports to the U.S. more expensive. In fact, that is exactly what happened post the G20 meeting. USD/CNY fell. Gold rose to $1250, its highest level since July. If the Chinese continued with this appeasement approach and the U.S. was mollified, USD/CNY was unlikely to go any higher. Then when the U.S. stock market crashes and the Fed reverses policy, the dollar in general, and specifically USD/CNY, would likely go down. This would mean Gold had bottomed out and was going higher.
Then the news came out about Huawei’s CFO being arrested and China’s furious response. This indicates that although China may try to play for time, the U.S. is on to their strategy and is not falling for it. China’s appeasement has been met with U.S. antagonism. Escalation of tensions and 25%+ tariffs are therefore still a risk, as is a higher USD/CNY exchange rate. It has already risen somewhat from its lows earlier this week. At the risk of stating the obvious, Gold could go either way from here, but the risk of lower Gold prices in dollar terms remains.
As for the newfound dovishness from the Fed since the S&P fell over 10% from its peak on October 3, this does not mean the Fed is going to reverse policy any time soon. I believe the Fed is merely doing what it has always done when stocks hit a rough patch: try to talk it higher. I also believe they will hike rates again on December 19. That said, they will try to continue to get at least two more rate hikes next year by using the same dovish talk, but it seems that the markets may have finally woken up to the fact that actions speak louder than words.
A stock market crash is unavoidable at this point, in my opinion. Liquidity is all that matters to stocks, and it is falling. It is only a question of when. October was just the beginning of the first leg down, then comes the rally, then the main event, the crash to 2100/2200 S&P (“ABC” in Elliott Wave terms). The buyback blackout period starting in January is a possible candidate for that main event. If not, we’ll have to wait a little longer. When it does occur, Gold could fall initially, as in 2008. But when it becomes clear that the Fed is about to reverse policy, I expect the dollar to peak and fall hard, USD/CNY also. Gold soars from that point forward.
In the meantime, Gold has rallied to $1250. As I stated in my previous article, Gold is now facing tough resistance between 1250-55 and the 200-day moving average just above there at 1261. It’s currently in a channel upwards that looks like a bearish flag structure. This means that if it can’t break that resistance, but breaks support at around 1206 and 1200, it could go a lot lower. Furthermore, the new highs this week are currently negatively divergent on the DSI, RSI, and both MACDs. The fact that Silver, Platinum, and the Miners are not confirming this move up in Gold is also a concern. USD/CNY could continue to rise also.
In conclusion, we still do not know if the bottom is in for Gold yet, but it could be. If it isn’t, it is at most a few months away, in my opinion, when the U.S. stock market crash occurs. But the main point is this: the risk to the downside from here is far outweighed by what is to come for Gold on the upside starting in 2019.
I’ll end by repeating what I said before: don’t wait for a lower low that may never come. Even if we do go lower, you may not be able to buy at that price. If you don’t own any physical Gold or Silver today, buy “some” now. You don’t want to be chasing the price of Gold when it rises, because when it does take off, it will be explosive, in my opinion. It typically always is.
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.