T.S. Eliot had it wrong. For gold, April isn’t the cruelest month, March is. Every year for the past three years we’ve seen a significant rally in gold during the first quarter. Hopes are raised that finally, the bear market is over.
But, as we get into March the same thing happens every time, when faced with the possibility of a significant quarterly close, the rally peters out, ending with a whimper not a bang.
This year’s rally had us more hopeful than in previous years, since it began in December versus making the low for the year (black arrows on chart).
So, here we are in 2018 and just like in years past, gold runs up to the $1360-1375 area, the post-Brexit vote high, sees its shadow and climbs back into its burrow waiting for conditions to thaw more (red arrows on chart).
This has been going on since gold broke down below $1600 in April of 2014.
And 2018 is even worse than the previous two years because gold took a run at that resistance level in each of the three months in Q1 and retreated every time. It is now stuck in a very tight trading range between $1320 and $1360.
And one of the oldest adages in markets is coming to mind, “Those markets that can’t go up, go down and vice versa.”
Dollar Confidence
Gold has been pushing up against this resistance zone for the past year since the U.S. dollar began sliding. It’s been a very binary trade since Trump was elected.
So, with the dollar trying to form a bottom here, as expressed by the very dubious trade-weighted dollar index that doesn’t include the Chinese yuan, it’s not surprising currency traders won’t commit to a direction of the gold market.
And with nearly everyone a dollar bear right now, which makes zero sense to me, they are also, by extension, making an argument for gold in their simplified world view.
If there is one thing gold has taught me in the last 20 years it is that binary trades against it don’t last. And that’s because gold responds to a number of different factors differently. Those factors rise and fall in importance depending on where we are in the cycle.
But, the fundamental factor which drives the big direction in gold is faith in government. A secular bull market in gold can only occur during a period of failing faith in primary government institutions.
9/11 kicked off the last one, in my view. The history on it is clear. The U.S. government was attacked bodily that day which tore at the world’s view of its primacy. The response from then FOMC Chair Alan Greenspan was to radically lower interest rates and open the liquidity taps.
That fueled the first leg of the decade-long bull market. Then when his replacement Bernanke began pulling back and raising rates, he imploded first the marginal commodity markets, resulting in Bear Stearns’ failure and then a housing market collapse as the hot money turned cold and the banking system seized up.
Gold fell from $1033 to $681 during 2008 and the only response from the Fed was “Print, Baby, Print!”
This did not engender confidence. Gold’s second and more explosive wave of its bull market nearly tripled its price in just over two years.
Eventually, the central banks coordinated policy in 2011, the Swiss pegged the franc to the euro, Merkel was re-elected and that commitment to stability provided enough cross-market liquidity and confidence to rein in gold.
The Trump Train to Nowhere?
Part of what’s been fueling dollar weakness has been the fight-to-the-death between the Deep State and President Trump. Despite his many significant victories, Trump hasn’t convinced markets he’s out of the woods with his domestic enemies.
Moreover, markets don’t like an upset apple cart. Most investors would prefer a dysfunctional status quo headed over a cliff than switching tracks to an unknown new state.
We are really good at refusing to accede to reality, telling ourselves bedtime stories like “Deficits don’t matter” and “We owe this debt to ourselves” and “War is good for the economy.”
But none of those things are true. So, many see Trump and the rising wave of populism as a threat rather than as a cure. Even though his tax cut is a massive step in the right direction. Too bad this is looking like a replay of the 1980’s with Reagan.
Tax Cuts plus Insane Military Spending Equals “Iceberg! Straight Ahead!”
And they deploy their capital thinking that unrest in D.C. is more important than the insanity gripping the European Union.
This is part of the reason why the dollar is weak and the euro too strong. It doesn’t help matters that the Chinese yuan has been steadily strengthening versus the dollar and Chinese bond yields are dropping alongside the exchange rate.
And this paradigm could persist for another few months while Trump invites chaos domestically while trying to solve deep geopolitical problems, like North Korea’s nuclear ambitions, our presence in Syria and our trade relations with China.
We’re going to see an ugly summer of violence and social upheaval as the Democrats fight for their political lives thanks to them fracturing their coalition during the 2016 primaries in favor of Hillary.
Gold is Trapped
So, in this environment, it looks like everything is lining up for a gold breakout. The dollar is weak, D.C. is in turmoil, the ECB still has things under control in Europe, there’s a threat of war with Russia (which is actually already here, the bigger threat is peace), the petroyuan was just birthed challenging the dollar at its fundamental as the world’s trade and reserve currency.
So, if that’s the case why won’t gold break higher? Why did it get sold with impunity in the final days of March?
Because with rising interest rates there isn’t a lot of dollar liquidity. The LIBOR markets are screaming that there’s something wrong in the interbank market. But, as Zerohedge has pointed out time and again in the past two weeks, the fairy tales about this continue to be believed.
Check the link, look at the quarterly closing charts and tell me that’s a gold positive environment.
The banks always puff up their books to make their quarterly reports look good, gold is usually the recipient of a liquidity-drive-by in late March. The Fed never helps with its March meeting communication either.
If Trump wins big on foreign policy initiatives like North Korea and the Iran nuclear deal, leading to the beginnings of a Middle East peace plan, then gold will have no upward driver.
If there’s going to be a breakout in gold in Q2 it will be because of Italy and it’s political class moving into open revolt against Brussels and Berlin. This will shift the market’s focus back to Europe where it belongs and begin a reversal in the euro pushing up European bond yields and leading to an ugly period coming into the mid-terms here in the States.
And that’s why I’m still not quite bullish on gold.