Yesterday I discussed the gold price and provided some reasons as to why the yellow metal could move higher in the months ahead.
Let me emphasise the word could. Gold is in a downtrend right now (see chart and note the falling moving averages). Buying anything in a downward trend is a low probability play.
What I suggested yesterday is that the plunge into the mid-August low could be THE low before another big rally unfolds.
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But I don’t suggest you put your money where my mouth is just yet. I don’t recommend buying assets when they are trending lower. You’re much better served buying when prices are moving higher. Remember the old adage, ‘follow the money’? That’s what buying into strength means.
What dictates the price of gold?
But today I want to continue the discussion on gold. There are two components to any asset price — a fundamental component and a ‘psychological’ component. When it comes to gold, the ‘psychological’ component has a big impact on prices.
When there is fear, prices rise well above what the fundamentals suggest they should be. When there is a lack of fear, there is little to no premium above the fundamental price.
Right now, we are in a period of ‘no fear’. That’s not surprising given the S&P 500 is near all-time highs. The chart below shows gold relative to the S&P 500. Gold hasn’t been this cheap relative to US stocks since 2007!
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That’s not to say the ratio can’t deteriorate further. I’m just pointing out the stretched relative valuation.
What’s next for the price of gold?
Yesterday I mentioned there could be political reasons that could support the gold price in the months ahead. Let me explain…
Firstly, you would’ve seen the news splashed across the media yesterday that blamed recent market jitters on Trump’s tariff war with China. In nearly every article, Trump is characterised as some sort of unhinged economic vandal.
Here’s a tip, ignore the mainstream media (MSM) on Trump. They’re playing the man, not the ball. He’s a threat to their existence, and so they’d rather play at Trump bashing and emotions than tell you what’s really going on.
If you want to get an understanding of what’s behind Trump’s tariff war with China, watch the documentary, Death by China, first aired in 2012. It’s based on the book of the same name, by one of Trump’s trade advisors, Peter Navarro. It makes for sobering viewing.
In short, it argues that Bill Clinton sold China’s entry into the World Trade Organisation in 2000 to the American people on a false promise. He said China would have to adhere to free trade principles and that US corporations would be able to sell into China’s vast market with goods made by Americans.
But it didn’t work out like that. The multinationals that had lobbied heavily for China’s entry began to quickly offshore their operations. The US manufacturing sector hollowed out soon after, with the loss of millions of jobs.
In 2001, the US had a trade deficit with China of US$83 billion. By 2017, the trade deficit was US$375 billion.
In other words, China, and the companies that set up shop there, have done very well from China’s WTO membership. The average American, not so much. They have lost their jobs, and taken on debt to pay for goods now made in China.
The documentary goes on to explain why China’s trade practices are unfair and in some cases illegal.
Whatever you views on it, the reality is that this is Trump’s view. He sees the actions of past governments on trade as selling out the American people. As a result, he wants to level the playing field.
Whichever way you cut it, if he’s successful this is going to involve some pain for US multinationals. And that means pain for the stock market. Whether that realisation comes sooner or later, I don’t know.
But when it does, it’s probably going to be positive for gold. That’s because trying to reverse a decades old policy will result in a lot of uncertainty. Gold likes uncertainty.
The other factor that’s positive for gold is one you won’t see accurately reported on in the MSM. They’re too busy bashing Trump over the tariff issue.
On Monday in the US (Constitution Day!) a White House press release stated that President Trump has ordered the declassification of a court order used to spy on Trump’s election aide, Carter Page, as well as the release of interviews and all text messages relating to the Russia investigation between FBI heads.
If you haven’t been following the story, that might not mean much. But what this information will likely show is that the heads of the FBI and Department of Justice conspired to frame Trump with colluding with the Russians to influence an election.
We already know from other news sources that the FBI leaked stories to the MSM and then used those stories to present as evidence to the courts to spy on Carter Page and make the case for a Trump/Russian collusion.
When the declassified information, interviews and text messages are released, it will likely reveal deep corruption within the highest levels of the government, and that the real collusion is between government departments and the MSM.
This information is not widespread at the moment. The MSM, for obvious reasons, are not reporting on it. But it will come out, and if it does indeed reveal systemic corruption at the highest levels, it will undermine the investment community’s faith in US government institutions.
That could also be positive for gold.
In short, I think political risk is about to play a big role in gold’s coming rally. Trump is trying to drain the swamp, and the swamp will fight back. This will create a huge amount of disinformation and uncertainty.
Editor, Crisis & Opportunity
PS: If you’re thinking now is the time to jump back into gold investments…you could be making a huge financial blunder! Find out why here.