Lundin's Golden Strategy

05/09/2017 2:50 am EST

Focus: COMMODITIES

Brien Lundin

President, Jefferson Financial, Inc.

Gold had been holding on -- just barely -- as the geopolitical worries that had propelled it higher in recent weeks began to fade, explains Brien Lundin, gold and junior mining expert and editor of Gold Newsletter.

I’d warned that such factors represented a weak foundation on which to build a gold rally, because fears eventually subside. What gold really needed was a monetary driver to give the metal an underlying reason to keep moving upward.

While the long-term picture is very bullish in this regard, with monstrously large debts in the U.S. and other developed economies necessitating significant currency depreciation against gold, the short-term outlook was more muddled.

As it turns out, the short-term monetary factor most influencing gold was the recent Fed meeting. While no rate hike was expected and none was delivered, the Fed did manage to somewhat forcefully present its view that the economy’s first-quarter slowdown was temporary.

The statement was hawkish enough to raise the odds of a rate hike in June from 70% to about 97%. And that was enough to send gold skidding lower.

It’s worthy of note that the decline in gold and silver is part of a broader sell-off in commodities, including oil, natural gas, copper and other base metals. Generally speaking, the base metals have given up all their gains since Trump’s election victory.

Also interestingly, this sell-off in commodities is continuing today even as the Dollar Index is pulling back.

So what is the market looking at to come to the conclusion that not only commodities are overpriced, but also the U.S. dollar?

Part of it can be blamed on some indications of economic weakness in China and India, where the latest services PMI indices are showing declines.

My view is that the Fed’s confidence in a robust U.S. economy is ill-placed. And they probably know it. In fact, they are likely raising rates primarily to provide more room to cut if/when the inevitable recession hits.

Yes, the first quarter’s GDP growth of only 0.7% merely falls into the same recent pattern of slow first-quarter growth. But the dramatic drop in forecasts from the early levels of nearly 3.5% growth to the disappointing actual result is an indication of fairly dramatic slowing over the first three months.

In comparison, the current Atlanta Fed GDPNow forecast for second quarter growth is a lofty 4.2% annualized rate. That implies a rubber-burning turn-around that is no doubt possible, but also represents a bold assumption upon which to place the hopes of global traders.

Any hiccups in that forecast will roil markets. Gold would be one of the few beneficiaries in such an event.

Summing up, investor expectations have now been reset, somewhat forcibly, to assume a Fed rate hike in June.  As with every rate hike since the Fed’s first foray into the normalization process in December 2015, this sets gold up perfectly.

Traders will short gold in advance, and cover those shorts — buying the metal aggressively — once the event occurs.

For gold, it’s technical picture has been degraded significantly by the recent selling. The price has fallen decisively through both its 50-day moving average ($1,250) and its 200-day moving average ($1,256). Additionally, the pattern of higher highs and higher lows this year is in danger.

This being May, it may be time to go away, as we could see a sideways to down pattern emerge over the next couple of months. My view is that we buy value when we see it, and try not to be too smart in our attempts to time the market.

I wouldn’t recommend aggressive purchases, but I’d have no problem in pecking away at companies with large, proven gold resources such as Atlantic Gold (Vancouver: AGB) and Aurvista Gold (Vancouver: AVA).

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