There’s a time for gold stocks to rally… and a time for consolidation and retracement. We have joy, we have fun, we have gold price seasonality in the sun?
Here is a view seasonality on the daily gold chart.
The COMEX price of gold is determined mainly by commercial bank traders and hedge funds reacting to physical market supply versus demand. Currently, mine supply is relatively constant, central banks are net buyers, and the scrap market is stable.
With supply essentially fixed, the seasonal ebb and flow of demand is mainly what moves the price.
Roughly speaking, physical market demand strengthens from August until February and it weakens from February to August.
It’s April now, so higher price enthusiasts need patience.
Events related to the “fear trade” in the West can upset the seasonality apple cart, but a US-China trade deal seems imminent, there is still some time left in the US business cycle’s bull run, and the Fed’s recent actions are likely to reinvigorate stock buybacks.
Unfortunately, in the short and medium term, there’s not much related to the Western fear trade that would “juice” gold ETF or COMEX contract demand enough to make up for the current seasonal physical market slackness.
Trump is a business-oriented president, and the private sector in America is quite healthy. He’s supporting that health. In contrast, the government sector (in America and most of the Western world) is a horrifying mess.
Trump, like his presidential predecessors, has lorded over a massive rise in government spending and debt. Unfortunately for Trump, he just happens to be president when the government’s ability to borrow ever-more money will soon meet a brick wall. Legendary hedge fund manager Ray Dalio believes the government may have only two years of “sand in the hourglass” before the demand for US T-bonds fails to match the supply.
I’ve suggested the US government could stagger forwards for another 3-4 years before a bond market supernova event occurs. Regardless, the bottom line is that the next financial markets meltdown is set to be a government crisis much more than a private sector crisis. The government’s dollar is like a corporation’s stock, and it will burn as its bond market burns.
I’ve also predicted that unlike the late 1930s crisis that was followed by US war with Germany, Japan, and Italy, this crisis could cause a war within America, pitting the rich against the poor. It could get quite ugly, especially for citizens with no gold.
An institutional gold buying frenzy would occur in even the mildest version of this projected scenario. A collapse of the US bond market would smash other Western government bond markets too.
In a government bond market crisis, all roads lead to gold!
Also, QE doesn’t work in this type of crisis, because it’s no longer a booster shot for private sector stocks, businesses, and bonds.
In 2008-2014, QE was mostly deflationary. When it’s used again, it will be used to fill a demand gap for government bonds. In that situation, QE is highly inflationary and could even become “hyperinflationary”.
This is the Vaneck Vectors Gold Miners Etf (NYSE:GDX) chart. The weak demand season for gold has only been underway since February, so patience is required.
Regardless, the price action of GDX and its leading component stocks has been impressive. Most of the strong season gains are holding and the price action is essentially sideways now.
More “bump and grind” trading is expected but the gold mining stocks market is generally very healthy.
How should investors deal with the weak demand season for gold in regards to GDX and gold stocks in general? Well, for one possible solution, check out the hourly bars swing trades chart for GDX.
iShares 20+ Year Treasury Bond (NASDAQ:TLT) is a bond market ETF. The next signal will be a sell, which means interest rates will rise in the short term. That’s likely because institutional investors see a US-China trade deal as imminent, and so they are moving money from bonds to stocks.
Because investors are taking more risk now, fear trade demand for gold is softening at a time when love trade demand is seasonally soft. This is just short-term noise. A bond market supernova event lies ahead. During normal times, higher rates are usually mildly negative for gold. During extraordinary times featuring a US government bond market wipeout, rates soar but an institutional buying frenzy means that gold market investors need to prepare for vastly higher prices.
Written between 4am-7am. 5-6 issues per week. Emailed at aprox 9am daily.Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form. Giving clarity of each point and saving valuable reading time.
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