Gold Needs to Consolidate Before Challenging the All-time High

The market is a cold and callous beast. It has only two emotions — fear and greed. It has no room for anything else. No sympathy, sadness, remorse, regret, love or happiness. The presence of money strips the complexity of humanity back to two base feelings.

I bring this up because, overnight, a crazed lunatic stabbed and shot a British MP on the street. The murdered woman, Jo Cox, held a pro-European and pro-immigration view. The belief is that the murder was politically motivated.

The Brits have had the good grace to cancel any campaigning over the Brexit referendum in the wake of this crime. Despite this, the market’s reaction has been as swift as it has been cold.

According to the market’s interpretation of events, the risk of Britain leaving the EU is now diminished. The brutal killing has clearly tainted the ‘leave’ cause. That’s the kneejerk reaction, anyway. But it remains to be seen whether Jo Cox’s death was politically motivated or not. Given the huge stakes involved (politically), there’s a good chance we’ll never know.

The market’s reaction to the news was brutal. Gold was in the process of breaking out to new highs, hitting US$1,315 an ounce, before reversing sharply and finishing the session around $1,285.

Surprisingly, the US dollar index fell along with gold. This is unusual, as gold and the US dollar normally trade in the opposite direction.

The Dow Jones index started the day down 120 points before swiftly turning around and finishing the session 93 points, or around 0.5%, higher.

First fear…then greed.

The biggest mover on the day was oil. Brent crude tanked 3.6%, and is now trading around US$47.20/bbl. It completely decoupled from the broader stock market. It’s down nearly 10% in a week.

You have gold and the US dollar trading in tandem, and oil and the stock market diverging. What is going on? It’s the result of ample central bank liquidity, combined with the will of the people trying to assert their independence against this intrusion into free markets.

Not that we have anything resembling a free market. But central banks constantly pumping liquidity into the market is just a manifestation of the relentless erosion of freedoms people are subjected to. Financial repression must have an outlet somewhere.

That’s what Brexit is really about. It’s the desire to escape from the bureaucracy that is engulfing Europe. Britain is culturally different from Europe and the Brits are trying to assert this independence via the Brexit referendum.

Napoleon, head of the military state of France at the time, once referred to Britain as a ‘nation of shopkeepers’. What he meant was that England was a great trading nation, which had amassed wealth through control of the seas, which enabled trade to flourish.

Now, with a horrendous current account deficit of around 7% of GDP, Britain obviously isn’t keeping shop too well anymore. Like Australia, they’re selling off land, and the promise of stable government (relatively, anyway) and the rule of law to fund their standards of living.

Like Australia, Britain is borrowing huge amounts of money, much of it coming from Europe to keep the consumption party going. They’re able to do this because of the credit and credibility the nation has built over hundreds of years.

But Napoleon’s sentiment still holds true. While the shops may be boarded up, the cultural aspect of once being a ‘nation of shopkeepers’ hasn’t changed.

In the past, nations who built their wealth on trade generally did so from having a strong rule of law and institutions, while maintaining a liberal economic philosophy. That is, the freedom of movement of people, goods and capital, and an absence of an onerous bureaucracy to stifle trade.

That is what made Britain great. As an aside, it also gave Charles Dickens plenty to write about, but that’s another story. My guess is that it is this cultural memory that makes Britain wary about continuing down the road with the European Union.

Anyway, I got off the point. What I’m trying to say is that this constant meddling in the economy, this constant manipulation of the price of money and credit, has far reaching and long term consequences.

The issue of Brexit and the ongoing stresses across the European economy is just one such consequence. The rise of Donald Trump is another.

Check out the chart below. It shows the European Central Bank’s (ECB) balance sheet is back to the highs from 2012, when it was all about Grexit. Has ECB boss Mario Draghi been pumping liquidity to ward off Brexit? It certainly looks that way.

Eurosystem total assets

Source: The Daily Shot
[Click to enlarge]

Speaking of meddling, the Bank of Japan decided not to meddle at its monetary policy meeting yesterday, throwing markets into a tizzy as a result.

Clearly, the junkie wanted another hit. The initial response was to send the Nikkei sharply lower, and the yen and gold sharply higher. That’s why the Aussie market finished slightly in the red yesterday, after starting off on the front foot.

But all that reversed following events overnight. It will be interesting from here to see what kind of follow-through we get in the days ahead.

Before signing off for the week, I’ll leave you with this…

Gold priced in Aussie dollars reached a high of $1,806 an ounce overnight, before selling off sharply as markets reversed course. This was the exact high reached in early February.

That tells me gold has to back off and consolidate for a while before making a sustainable move higher and challenging the all-time high of $1,836 an ounce, reached in September 2011.

It might take a few weeks, or a few months, but I think it is only a matter of time.


Greg Canavan,
For Markets and Money

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets & Money