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Dear Fellow Investor,
Good news is bad news, once again. At least for gold bugs.
The good news: Yesterday morning’s retail sales report showed a 0.3% bump in April, in line with expectations.
The bad news: The report was good enough to send the dollar up, the 10-year Treasury yield over the dreaded 3% benchmark...and precious metals down. Way down.
Gold had been trading weakly in recent sessions, failing to make ground after bouncing off of its recent fall to near the key $1,300 level. The positive retail sales report was just enough of an excuse to send gold below its 200-day moving average at around $1,307...and once that happened the bottom dropped out.
By the end of the day, gold had lost nearly $23, or about 1.75%.
Today it’s actually up a couple of bucks. Importantly, it’s up even as the dollar itself is up a bit. That shows that some bargain-hunting buying is coming in to support gold, as I’d expected.
Of course, the important thing to consider is the dollar. The inverse correlation between gold and the greenback has been especially close over the last two years.
Over that time span, the dollar has been trending generally downward, which is why gold generally trended higher. But over the last month or so we’ve seen a rebound in the dollar that has the market all abuzz...and which has sent gold plummeting from around $1,350 to today’s levels around $1,290.
However, as you can see from this chart, the dollar’s rally is still relatively insignificant once you pull back to see the long-term trend. Not until the Dollar Index gets to around the 95 level will I start to worry whether the trend has legs.
And there are a lot of reasons to believe that the dollar’s uptrend will end soon.
For one thing, a strengthening dollar is the complete opposite of what the Trump administration wants. And regardless of what the Fed does, the dollar is under the control of the Treasury...which is in turn under the direct control of the Administration.
Trump’s economic team is laser-focused on trade, and they simply won’t tolerate lasting strength in the dollar. So from this standpoint alone, the upside in this rally is limited.
Secondly, the U.S.’s primary trade partners have yet to begin their own quantitative tightening processes, while the Fed is already in the back half of its own tightening.
Add in that the eurozone economy is currently outperforming the U.S. and it’s easy to see why the dollar’s competition — the euro, the yen and the pound — could soon also outperform.
The fact is, once Europe gets past the confusion over the Italian elections, the euro should rebound.
Finally, and further to the above, the dollar tends to weaken following Fed rate hikes. The next Fed decision will come soon — on June 13 — and I expect the dollar to weaken no matter what the FOMC decides to do.
That would correspond to strength in gold.
Still No Reason To Celebrate
All this said, there’s no doubt that gold bugs are reeling from yesterday’s big sell off.
Significant damage has been done to the gold chart, which is why some analysts are calling for a drop to $1,250, or even $1,235.
While nothing would surprise me, I frankly don’t expect gold to fall that far. The metal has been doing well enough in non-dollar currencies that I believe we’ll see some bargain-hunting buying from overseas investors that should support the price.
In fact, we’re seeing a bit of that today.
Also, I’m confident that the commercials have begun to cover their shorts and reset the paper gold market. If so, then the stage is set for another rally.
So what should you do now?
I’ve had a couple of new recommendations in the holding pen for Gold Newsletter and our Gold Newsletter Alert Service, awaiting better entry prices.
While we’ve gotten better prices, I’m still a bit nervous about another downdraft in gold. So I’m holding off on making any new recommendations for now.
If you have some good junior mining stocks on your shopping list — particularly those with large-scale, identified gold and/or silver resources — you should begin pecking away at them.
But save most of your ammo until things have settled down.
And if you’d like to get all the details on those exciting new recommendations I’m about to make in Gold Newsletter, just CLICK HERE to subscribe now.
All the best,
Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference
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