Caution in the short term

From The Maven Letter: March 29

Almost every week the pundits point to a different ‘reason’ for gold to be on the rise.

There’s the rate hike, which ended the pro-dollar positioning that had hampered gold and let the yellow metal rebound. Then there was news from both Europe and Japan that they plan to tighten, an idea that sent the euro and the yen up and consequently the dollar down. Most recently we had Trump’s failure on health care, which has the Trump Bump markets worried that Trump may not be able to accomplish all that after all.

Let’s take on that last point first. The Affordable Care Act Repeal and Replace failure was inarguably significant. Trump’s team pointedly put this legislation on a pedestal, a centerpiece in the campaign and since the election. Their failure, then, to rally enough Republicans to the cause is important.

Everything they try to do from now on will be more difficult, now that those on the far right have seen they can block the administration if they want. Don’t doubt that they will use that power every time Trump suggests something that gives a single iota to the center.

Wall Street noticed. If Trump can’t manage health care, how is he going to manage tax reform? It’s a very fair question and one that goes right to the heart of the Trump Bump. Trump has to figure out how to pass something in the House, and soon, if he wants to maintain the market’s optimism about his Can Do Businessman approach.

Literally the whole reason the market ran up after the election was because America now had a capitalist president who was going to cut corporate and marginal tax rates deeply. Now there is real concern about whether he will be able to do that…at all.

Investors clearly got too excited about what Trump would do for business in America. That excitement lifted equities too high. The ACA failure was just a specific reason to invite reality in for a visit. Reality is a fair bit lower.

And that reality will continue to hamper stocks, bonds, and the dollar until Trump demonstrates some political success. If that doesn’t happen, I wouldn’t be surprised to see the S&P slide to pre-election levels. That’s a 10% loss, which to a market that has almost forgotten what declines are will feel like a lot more.

Of course, it all works for gold, which saw nice gains as soon as Trump pulled the ACA vote on Friday.

Gold has held those gains since, but there are (again) technical reasons to be cautious. Last week I pointed out the 200-day moving average as an important resistance level. We touched it this week, but came back off.

That recent high of $1,259 per oz. was the same high gold managed in February before backing off. This is the key range, $1,250 to $1,265 per oz. If gold can break up through this barrier, the spring run will have legs yet.

But it might not do so. Technical resistance is one reason. The fact that gold mining stocks have not been tracking gold higher is another. Gold is up 11% so far in 2017. The GDX is up 0.7% – it is essentially flat.

In recent days the index of gold miners has managed to stick close to its 50-day moving average but it remains well below its 200-day moving average near 25 and it failed to respond at all, really, to gold’s gains in the last week. The GDX also remains well below its February high, which gold regained, showing that miners’ underperformance is not a one-day event.

That is concerning. It might be because US markets are sliding, which prompts investors to dump equities across the board, including gold miners.

The next week in gold will be very telling for the short term. If gold breaks up above $1,265 per oz. and holds upward momentum for more than a day, the spring rally still has legs. The miners following gold’s gains would confirm those legs. If, however, gold fails to break up through that resistance level then the spring run might already be done.

That only matters for those who want to trade seasonal patterns. If that is you, watch gold over the next few days. I will be doing the same and, if it looks like the spring run is over, will execute a few sells next week.

The long-term outlook remains solid. For one perspective on it, I like Palisade Research’s Bull and Bear Market chart, using the TSX Venture Index as a proxy for the mining markets.

It’s a simple reminder that the current market, to date, is short and small. Past patterns are no guarantee of future results but, in combination with all the reasons we discuss regularly for gold to gain in the long term, I like the context these patterns provide.