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Dear Fellow Investor,
Yes, be careful what you ask for. We wanted and expected a gold rally — but not exactly like this!
Let’s recap the amazing few days we’ve already seen this year....
Investors returning to their desks after the holiday season found a new gold rally well underway.
This was just as we had predicted, with the move actually beginning in the closing days of 2019, and the portfolio we had recommended in early December rose significantly in response.
But we didn’t expect the attack on Iranian general/terrorist Soleimani and the resulting turmoil in world markets. That turmoil included a spike in the price of gold that, as of early this morning, had taken the metal to nearly $1,580. (That was about $75 added to the price in less than three sessions of the new year.)
Whew — what a year it’s been already!
On Friday, shortly after the news broke of the U.S. attack, I warned readers of my Gold Newsletter Alert service that this was an example of gold doing the right thing for the wrong reasons.
As I wrote then:
In fact, rather than being the undisputedly bullish development for gold that many believe, last night’s strike on Soleimani actually threatens to temporarily derail the gold rally.
We were just beginning to get wider acceptance of the fundamental monetary issues that are driving the price of gold higher. Now the market may confuse the driver as being geopolitical in nature, and the inevitable correction once things calm down may damage the previously healthy outlook for gold.
That said, I would not be surprised to see gold continue rising as the world anticipates Iran’s response, which assuredly will be forthcoming. I would also not be surprised to see gold give up today’s gains in the days just ahead as public attention becomes distracted.
The bottom line is that this military strike is no reason to buy gold.
Over the long term, today’s move will be an ever-diminishing blip on the gold-price trend. That’s because the fundamental monetary issues of huge and rising debt loads, necessitating ever-easier monetary policy, will lead to higher gold prices in 2020 and much higher levels over the next few years.
I stand by these views, even after gold soared about $28 this morning, and subsequently gave up the majority of those gains to “only” trade about $11 higher on a spot basis.
Because the risk is still there that this price spike, founded upon a geopolitical event, will quickly reverse. And we’ve seen that kind of volatility even in the narrow context of today’s trading.
All this said, if the underlying monetary dynamics are already favoring gold — and they have been — then a geopolitical event can act as a catalyst to accelerate those trends.
For example, gold typically trades with a very strong inverse correlation to real yields, with falling real yields driving demand for gold and leading to rising prices for the metal. Real 5-year yields were already in a steep, short-term decline before the killing of Soleimani, but they spiked lower, and the gold price spiked higher, on the event.
The fact that this event is supporting a trend that was already strongly in place presents the possibility that it could trigger further gains, especially if it forces the substantial shorts in the gold market to cover their bets.
Today we’ve seen the stock market recover much of its opening losses. While gold has also given up much of the gains it showed upon the opening, I’m impressed with how the metal has rebounded from its lows on the day. It seems that demand for the metal, for whatever reasons, is still strong.
With this kind of volatility, investors shouldn’t be surprised by anything gold does over the short term. I do believe that the monetary fundamentals of massive debt loads and ever-easier monetary policies not only indicate significantly higher prices over the longer term, but demand them.
So whatever happens to gold over the coming days, gold bulls will eventually be on the right side of the bet.
The good news is that, while the “mini-portfolio” of resource-rich stocks I recommended in early December is up about 15% already, most mining stocks have not reacted to these geopolitical developments. That’s understandable.
But this means there’s still plenty of opportunity around, as I expect these companies to eventually respond as gold continues higher over the months ahead, in response to the very bullish monetary factors in play.
So don’t buy gold or silver based on these geopolitical developments. But consider the mining stocks, even the indices like GDX or GDXJ, to play the longer-term move.
All the best,
Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference
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