The Trump Effect And Gold Prices

For some time, I’ve expected 2018 to be gold’s breakout year. Although it is still possible, the odds have declined severely.

What happened? Well, many factors influence the price of gold – interest rates, inflation expectations, currency/trade wars, monetary policy, stock markets trends, investment demand and consumer sentiment to name a few. Right now, big money (globally) prefers US stocks, and it’s hard for gold to compete with high flying tech stocks.

The Trump Effect: I think I can safely say the majority of gold challenges stem from Trump. The economy was rolling over into a recession in 2016 (see earnings chart below) and gold responded positively. Prices bottomed at $1045 and rallied to $1377 by July of 2016. However, everything changed when Trump won the election. The economy began to recover later that year, and his tax cuts extended the business cycle. We would have likely continued into a recession and gold would be much higher today if Hillary won the election, in my opinion.

Now, this doesn’t mean gold is dead – it’s merely out of favor for the moment. I think the “Trump Effect” only postponed gold’s breakout. The business cycle is still very mature (second longest since 1857), and earrings will begin to slip next year. The yield curve is nearly inverted and that almost always precedes a recession. More on that later.

However, I believe the primary driver behind gold is consumer sentiment. Right now, the average guy isn’t thinking about gold. The stock market is making new highs, wages are up, inflation is modest, and unemployment is at multi-year lows. He couldn’t care less about gold. Don’t believe me? Ask an ordinary person what they think the price of gold is. If they are within $200, I’d be amazed…some will be off by $1000 or more.

Like him or hate him, Trump has been good for US business and the economy. Consequently, that has made it difficult for gold. To lift prices from of the pit of misery (Dilly-Dilly), we need an economic slowdown (next year), major political event or financial crisis. Gold will catch a bid once consumer sentiment softens. The bureaucrats are trying hard to seize power back from Trump. If they’re successful and throw him out of office, gold will reverse immediately.

In the meantime, I think we need to respect golds downtrend and the current bear flag configurations in silver and miners. If prices are going to break lower, they will likely do so this week. Precious metal investors must remain nimble and consider other sectors for trading opportunities. I think both oil and bitcoin may be approaching meaningful tops.

Consumer Sentiment

Consumer sentiment tells the story. It’s a challenging environment for gold when consumer sentiment is in an uptrend and near multi-year highs. Sentiment bottomed in 2011 at 55, that’s when gold topped at $1923. Consumer sentiment has been trending higher ever since. It began to breakdown in 2016 (red arrow) but reversed. That dip in sentiment coincided with gold’s rally to $1377. The trend once again looks weak and is beginning to rollover. Dropping below 86 (currently 96) will establish a downtrend, and that is an excellent environment for gold.

Yield Curve

The yield curve (2’s vs. 10’s) is almost inverted. Meaning the 2-year note (2.62%) has nearly the same yield as the 10-year note (2.86%). An inverted yield curve almost always precedes a recession and bear market in stocks. I believe yields will invert in 2019. A breakdown in consumer sentiment will follow. The topping process in stocks is usually choppy and often volatile. The stock bear emerges from its den when consumer staples begin to outperform discretionary stocks dramatically (bottom indicator). Trump’s policies extended the business cycle, but it is still very mature. The stock market will likely top in 2019. Breadth will begin to wane near the top as fewer, and fewer stocks make new highs with the market. Money will begin to flow out of discretionary stocks and into consumer staples, utilities, healthcare, and financials. That shift in sentiment will be good for gold.

US Dollar

I think the 55-day cycle bottomed on Tuesday (52-days). Prices would have to reverse sharply early next week to suggest otherwise. A swing low formed, and prices closed above the 10-day EMA. Closing above the 95.62 pivot will confirm a cycle low.

Gold Price Chart

If the dollar bottomed then gold probably topped. Follow-through lacked after last week’s bullish engulfing day. The rebound off $1167 has been unimpressive. Caution is warranted. The price action Tuesday and Wednesday will be key. Closing below $1200 and then $1189 will imply a test and potential breakdown below $1167. Gold would have to close above $1215 early next week to break the bearish tone and make another run at $1220. Traders will have to remain nimble.

Silver Price Chart

Silver looks much weaker than gold. Prices reversed Friday and closed below the lower flag boundary (again). A breakdown below $14.31 early next week could send prices sharply lower. The next support level arrives around $13.65. Silver prices would have to rally and close above $14.80 to nullify the bearish setup.

GDX

Miners closed below the lower flag boundary. If this is a true bear flag setup, then prices should break sharply lower early next week. Again, I think the setup is a little too obvious, so I won't be surprised if it doesn't play out. However, it would have been unwise to ignore it. We should know by Wednesday if prices are indeed breaking lower.

GDXJ

Closing below the lower boundary in juniors could send prices sharply lower this week.

WTIC

I think crude is approaching a significant top, perhaps next week. I’ll use the next swing high to signal initial positions in SCO and ERY.

Bitcoin

Bitcoin prices are approaching trendline resistance. If prices begin to rollover within the next week or so, I’ll look to enter short positions in GBTC. Click for my August 23rd bitcoin update click here, it explains the potential secondary collapse scenario. Chart courtesy of cryptowat.ch.

For the time being, I’m turning the indicators to neutral for metals and miners. I think long-term investors can continue to cost-dollar-average into physical metals at these levels. However, short to medium-term investing will remain tricky until there is a meaningful decline in consumer sentiment. A significant political event (Trump impeachment talk) could change things instantly and send gold directly higher.

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