This post Trump’s Trade War and the Gold Rally appeared first on Daily Reckoning.
After a great run from $1,242 per ounce on Dec. 11, 2017, to $1,365 per ounce on Jan. 25, 2018, a 10% gain in six weeks, gold has settled into an up-and-down sideways pattern in the six weeks since.
The sideways range has stayed between $1,305 and $1,356 per ounce with two rallies and two drawdowns. Gold marked time at $1,322 per ounce at the beginning of this week, close to the midpoint of this recent trading range.
For the past two months, the dollar price of gold has been more reactive than proactive. Rallies in gold occur on fear of a trade war and fear of a stock market collapse. Drawdowns in gold occur when trade war fears abate and the stock market regains its footing.
Since the trade war and stock market volatility are both here to stay, investors should expect gold to continue in this up-down pattern until a more definitive picture — for better or worse — emerges.
Trump’s tough talk on trade has been dismissed as posturing by some inside-the-Beltway globalist elites. It’s not. Trump is serious about the tariffs he has announced so far and has many more tariffs and fines waiting to be announced in the weeks ahead. As markets realize the trade war is real, stocks will draw down and gold will rally in a flight-to-quality move.
Gold prices fell 2.4%, from $1,349 per ounce to $1,317 per ounce, between Feb. 2 and Feb. 8, a stretch when the stock market fell 11% in a full-blown correction. This caught many gold investors by surprise.
If stocks are falling out of bed, shouldn’t gold rally on the fear trade and flight to quality?
Not right away. Gold typically declines in the beginning stage of a financial panic. This is not because gold is an unattractive safe haven; it is. The reason gold declines is that gold is always liquid at times when unwinding stock and bond positions may be problematic.
In distress, the old maxim applies: “You don’t sell what you want; you sell what you can.” Stock traders were getting margin calls on losing positions. These stock traders did not want to sell stocks into weakness.
Banks needed liquidity to meet customer demands. For all of these parties, selling gold outright or posting gold as collateral (putting it on the rehypothecation market) is a reliable way to raise cash without selling stocks in distressed conditions.
We saw this same pattern in the panic of 2008, which occurred in the midst of the great 12-year gold bull market of 1999–2011. The worst performing year in that run was 2008, a time when hedge funds, banks and brokers sold gold for cash to repair the damage they were suffering on mortgages and, later, stocks.
But any gold drawdown in such circumstances is decidedly temporary. Once the weak hands have disgorged gold for cash, the strong hands emerge to buy the dips and start a new rally.
That happened in …read more
Source:: Daily Reckoning feed
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