Gold Smash

As we predicted last week, good news has sent the gold price tumbling. The question now is, how long will this correction last?

Dear Fellow Investor,

For the past two weeks, I’ve been shouting from the rooftops (or at least my newsletters and Twitter) that we were about to get some good news on the economy and the pandemic.

And that this would be bad news for gold.

Developments since then have supported my argument, and none more forcefully than today’s nonfarm payrolls report for May. Expected to show a loss of 7.5 million jobs, it instead came in with a stunning 2.5-million-job increase.

An astonishing swing of 10 million jobs that would’ve landed an economist in the loony bin had they predicted it.

Of course, things aren’t as rosy as this report would make them appear. And of course I never predicted such an amazing turn-around. (If I had, I’d be looking for much higher rooftops to crow from.)

But my basic point maintains: When the economic data and indices have been knocked so low, even the slightest improvements are magnified. The jobs report, however, was shocking and didn’t need the magnification. Thus, the sell-off today in gold and silver, with both metals down over 2%.

So enough of back-patting. What you undoubtedly want to know now is, what’s next?

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What Now For Gold?

First, let’s put things into perspective. After the dramatic, liquidity-driven crash of late February to early March, gold had taken off on a red-hot rally from mid-March to mid-April. From there it traded sideways as it digested those gains.

That has now evolved into indigestion.

In other words, gold needed a cooling-off period in any case, but now that’s developed into something more. And I’m not talking a mere technical case. Again, I fully expect some good news on the pandemic front, as well as more positive data on the economy as we come off this sharp bottom.

This will weigh on gold until we see the next rounds of monetary and fiscal stimulus in response to the stock market’s next big dive (which I also expect in the weeks just ahead).

It’s impossible to put a fine timeline on it, but I would expect a few weeks (not months) of weakness in the metals.

As I’ve noted before, I’ll take a backseat to no one in my regard for the dynamism of the U.S. economy. I’ve seen its response first-hand to natural disasters and I have to say I agree with President Trump’s comparison of the pandemic to a hurricane that will come and go.

But the bottom line is that the level of monetary and fiscal stimulus that we’ve already seen, in addition to its focus on providing money directly to U.S. citizens, will have the kind of real-world inflationary repercussions that were notable by their absence after the 2008 financial crisis.

And there’s more stimulus to come, you can bank on it. This is, after all, an election year. The Trump administration continues to push for a payroll tax cut, and they’ll likely agree to many of the Democrats’ demands to get it.

From the Fed’s standpoint, note the ECB’s announcement yesterday that they’re extending and expanding their QE program to at least June 2021 — an announcement that came despite the fact that the current program won’t expire until October. This not only gives the Fed cover for another move, it actually puts pressure on them to up the ante.

I expect them to do just that.

In summary, the long-term case for gold (and silver, and mining stocks) remains as bullish as ever. We have to expect — indeed should desire — these corrections along the way, and regard them as buying opportunities.

All the best,

Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference

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