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The Gold Price Is Dropping for All the Wrong Reasons Lombardi Letter 2018-05-17 12:15:01 gold yellow metal iran deal north korea trump oil price commodities safe haven shelter dollar The gold price is dropping even though all the macro actors should have encouraged investors to favor the yellow metal. The risk is that precious metal investors have turned bearish on gold because the $1,300-per-ounce floor was breached. Analysis and Predictions 2018,Gold,Gold and Precious Metals,News,U.S. Dollar,U.S. Economy,U.S. Politics,World Politics https://www.lombardiletter.com/wp-content/uploads/2018/05/iStock-525207023-150x150.jpg

The Gold Price Is Dropping for All the Wrong Reasons

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Gold Price Is Dropping

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There’s Nothing Logical About the Recent Drop in the Gold Price

The gold price continues to drop. It has even managed to drop to the lowest point of the year, breaking through the $1,300-per-ounce level.

That’s a tough psychological barrier to absorb, given that the oil price had until now resisted. Yet, such a price move suggests the presence, or interference, of significant factors in the economy.

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The irony is that all these factors should have encouraged investors to favor the yellow metal and prompted gold prices to rise.

The global political and economic picture is cloudy at best and diabolical at worst. Gold has always been—especially since the 1970s after President Nixon decoupled the U.S. dollar from the gold price—a safe haven.

What Is Causing the Sudden Bearish Turn in the Gold Price?

Gold, a precious metal, favored for jewelry and even used in technological applications, would at first glance seem to have lost its function as a shelter.

After the recent bullish course, justified by several unpredictable macro events, gold experienced a bullish rise. The gold price had settled comfortably in a range between $1,310 and 1,350 per ounce.

Other commodities like oil are climbing faster than the economy can absorb, but gold has lost its shine. The risk is that precious metal investors have turned bearish on gold because the $1,300-per-ounce floor was breached.

If that’s the case, confused gold investors will fall into a bearish trend that could intensify in the next few weeks, forcing the gold price to a downright “artificial” zone.

That is, the price might indicate such excessive negative sentiment as to prompt a gold price crash.

What’s Motivating the Gold Price Bears?

Investors should be aware of the existence of highly motivated bears entering the gold market. Many probably went short after the gold price fell to $1,300 per ounce.

Part of the problem is President Donald Trump’s politics. In one sense, President Trump has played all the cards that would have normally sent investors rushing to take refuge.

Tensions in the Middle East are at rising to an extreme level between the relocation of the U.S. embassy to Jerusalem and Trump’s unilateral repeal of the Iran deal.

There’s an inapt rise of the U.S. dollar. Or, better yet, there’s an inapt expectation that the U.S. dollar will be moving much higher.

The reason is that U.S. Treasury bill yields are rising. Traditionally, this contributes to the fall in the price of gold even if there’s no rule that says it should be so. Rising yields, on the contrary, are a sign of low confidence in the U.S. economy and ever more untenable debt.

Despite the buoyant performance of the stock market, there’s no correlation between the optimistic valuations and the rest of the economy.

Inflation has been rising because of an oil price spike. And the oil price moves have far more to do with global reactions to Trump’s geopolitical gambles than a rise in consumer confidence.

Uncertainty Will Only Increase

In fact, everything around the U.S. economy spells “be careful.” Tax cuts have gone into stock buybacks rather than reinvestment.

Yet, somehow, because yields are rising and the oil price-infused inflation is also rising, yields are also rising. This raises expectations that the Federal Reserve will raise rates.

And a high dollar is supposed to be bad for the gold price. By that logic, a high dollar is also inversely related to the oil price. Given the latter’s trend, the dollar should be dropping.

Yet, such is the overall economic and political landscape that logic must be temporarily dismissed.

Rather than try to blame this or that incongruence, investors should ask themselves this: Given the current drop in the gold price, is it time to invest in gold?

Gold Is a Safe Haven and Panic Is on the Way

Of course, there’s always a gambling element in such a question. The technical analysts use charts like some use tea leaves or coffee remains in a cup. Nevertheless, remember the role of gold as a safe haven.

Then consider the mounting risks playing against Wall Street and the overall global economy. My impression after pondering over these factors is that whatever conditions led to gold breaking the psychological level of $1,300 per ounce may not last much longer.

The thaw in Korea with the meeting between Trump and Kim Jong-un may have caused a false sense of calm.

As for the North Korean leader, he has already threatened to pull out. And Trump’s cancellation of the Iran deal may have been the real trigger.

Nobody trusts the United States, except for a limited number of countries, two of which are in the Middle East. Gold should, therefore, rise again.

The last floor of resistance seemed to be at just over $1,300 per ounce. If it moves past that, gold may have entered another bullish course.

Therefore, the current low may be more of an opportunity to buy than to sell.

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