On the news that British Prime Minister Theresa May called for snap Parliamentary elections in June, Gold (NYSEARCA:GLD) rallied to challenge $1300 in response to a huge move in the British pound (NYSEARCA:FXB). The pound hit a six-month high versus the dollar, briefly trading above $1.29 but has since given up a few pips.
But the real story in the precious metals is in the developing schizophrenia between gold and silver trading. Silver (NYSEARCA:SLV), as I pointed out in my article on April 6th, is trapped below the February high around $18.54 per ounce. Yesterday’s rally in gold was not confirmed by Silver at all.
While Silver ended last week near that resistance line, and even briefly pushed through it, the selloff to begin this week has been brutal.
In fact, while gold rallied, silver sold off in conjunction with the rest of what I call the Strategic Commodities – Copper (NYSEARCA:JJC), Oil (NYSEARCA:USO) and Natural Gas (NYSEARCA:UNG) and Iron Ore being the others. These are the commodities that major political strategies are game-planned around.
And with early action from today, Gold round-tripped yesterday’s rally and Silver sold off with it while the other Strategic Commodities have stabilized. This is saying quite clearly that there is something rotten brewing in the gold markets.
In for a Pound
The Pound has been building a base to break higher since November (See Chart).
The October low was such an extreme reaction that it looks to be an important bottom for the Pound that is dominating trading in 2017. This move yesterday has to hold through this week and, preferably, through the end of April for it to be significant and hold through the rest of the year.
A failed breakout versus the dollar for the Pound here would be very bearish. Technically, the two levels that are most important in the near term are the February high of $1.2708 and the November reaction high off of the spike low in October, $1.2776, which marks the top of the consolidation range highlighted in the chart above.
If the pound fails to hold those levels through the end of April, then this was a knee-jerk reaction that should be seen as short-covering. The October high of $1.2936 holds sway on the quarterly chart.
Why is the Pound important to the metals? For the same reason the euro (NYSEARCA:FXE) is. These are both major currencies which tell us a number of important things. The first is obvious, they tell us the relative strength of the dollar in international trade.
The second is less obvious and it is one of the main pitfalls of many market analysts, who think only in terms of one currency or one set of economic fundamentals. These currencies tell us the overall direction of global capital and the confidence that the holders of that capital have in the governance of that country.
The breakout of the pound after May’s election announcement was a vote of confidence for regime certainty in Britain during the Brexit process. A stronger Tory majority, which is expected, results in a clearer picture of what kind of Brexit we’ll have.
Don’t underestimate this effect. We saw a huge move in the dollar after Trump was elected, which has now dissipated six months later. Brexit has been nothing but good news for the British economy with improving economic data and capital inflow thanks to a cheaper Pound and the promise of relief from the EU’s strangling regulatory environment.
It was only a matter of time before there was a trigger to move higher.
But this may not be enough to create a new trend. Because the Pound is in a primary bear market that is far stronger than even the ramifications of Brexit in the near term. It will, however, likely stabilize the Pound for the rest of the year if it holds above the levels I noted above similar to the dollar post-election.
There is a possibility of a move back above $1.30 but strong resistance on the monthly and quarterly charts come in at $1.35.
The Dollar Problem
President Trump has given May all the support she needed to harden her negotiating stance with the EU. This also helped stabilize the Pound in recent weeks. Analysts who think this is a pro-EU move by May have this all wrong. This is a pro-Trump move to soften a dollar rally, regardless of what Treasury Secretary Steve Mnuchin says.
Trump knows full well that a rising dollar is a ‘yuge’ threat to any economic recovery plans he has. Rising rates will blow out the budget deficit and derail any stimulus and tax plans he has. Without a debt ceiling compromise in place, he’s going to have to make a deal with the Republican Freedom Caucus to continue funding government operations.
With his obvious reassessment, and I’m being generous here, of many of his campaign promises in the past two weeks, it’s safe to say that both Trump’s tax reform plan and $1 trillion infrastructure plan are in jeopardy with a Republican Freedom Caucus opposed to more debt and Democrats looking to stabilize themselves in the mid-term elections in 2018 by opposing him root and branch.
Moreover, he has to convince the Fed not to raise rates further this year. And that’s a tall order because the Fed wants further room to cut in case of a recession as well as wanting to unwinding its balance sheet. This is deflationary and only fuels the demand for dollars in international markets where still more than $9 trillion in dollar-denominated corporate debt needs servicing.
This will cut short any major appreciation of the Pound versus the dollar, especially if there is a political earthquake in France over the next few weeks with the results of the elections there. The euro will slide versus the dollar on a Marine Le Pen win as capital flight from Europe intensifies on ‘Frexit’ fears.
Safe Havens Abound
Geopolitical tensions are rising rapidly. The headlines are full of noise about us pressuring North Korea while Syria fades from the news cycle. Reports from there all point to Trump continuing to pressure Russia into giving up on Syrian President Bashar al-Assad.
The Turkish referendum saw President Erdogan narrowly achieve his plans to increase the powers of the Presidency which prompted two major responses. First, Trump declared his support of Erdogan’s war against the PKK Kurds. And Second, Turkey launched a fresh offensive northwest of Aleppo.
So, on the one hand Trump is trying to drive the dollar down while at the same time pushing it up by inviting foreign investment and engaging in military-backed international brinkmanship.
It’s no wonder that we’re seeing strong safe-haven buying in gold and U.S. Treasuries (NYSEARCA:TLT). Unlike the Pound, which is not the world’s reserve currency, the dollar cannot be dropped like a bad habit without first unwinding all of the dollar-denominated obligations first.
At the same time the commodity complex is trading like a new U.S. recession is already here but is still trying to find fair value from deeply oversold conditions looking back over the last few years. Copper and oil, especially, are still in primary bear markets. Deflation continues to rule the day.
And this is why Silver refuses to confirm Gold’s move higher in recent days because while geopolitics creates headlines, the big trends remain in place until there is a sea change. Trump’s presidency is looking remarkably pedestrian after a promising start.
For Gold, it is trapped between regime uncertainty in the U.S. and a stalling global economy.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I own some gold and silver, a few guitars and a lot of goats.