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Dear Fellow Investor,
As I watch (admittedly with some satisfaction) gold fight off a series of punches from the headlines, I can’t help but hear Stephen Stills singing in my head....
“There’s something happening here
What it is ain’t exactly clear...”
Think about it. Over just the last week or so, we had at least the makings of a tentative “phase one” China deal, a Brexit deal, a “ceasefire” in Syria and at least the thought that the removal of these headwinds would allow the Fed to forego another rate cut at the end of this month.
Any one of these developments represented the “headline risk” that I’ve been talking about — events that could prompt an immediate sell-off in the metal.
Add them all up and deliver them to the market at the same time...and well, I would not have been surprised to have seen gold shed $50-$100 in one session.
Instead, gold has slipped only a few dollars, and even posted a few positive trading sessions.
Of course, the bloom has come off the rose on some if not all of the above-mentioned positive developments. China says it still needs to talk further, the Brexit deal has been postponed by Parliament and remains up in the air, and the Syrian ceasefire hasn’t been all it was made out to be.
But still, gold’s performance — when the headlines and the technicals are still pointing toward considerably lower levels — has been impressive.
Today, gold is essentially flat, once again ignoring the potential negatives out there.
Of course, gold has been helped by a generally weaker dollar over the past two weeks. Ironically, the brighter outlook for a Brexit deal boosted both the euro and the pound, which mathematically means a lower Dollar Index.
As a result, the Dollar Index traced out a technical failure that had the bulls selling and the bears buying in recent sessions. The dollar’s gained a bit over the last two days but, if the greenback resumes its downtrend, this will obviously help support gold going forward.
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But What Else Is There?
As noted above, the brighter geopolitical news delivered a series of punches to the gold market that should have sent it staggering. That gold has weathered the flurry relatively well is an indication that there is some skepticism regarding the reality behind the headlines (as subsequent events have proven valid)...
...Or that there are some other undercurrents of worry that are driving increased demand for the yellow metal.
It’s probably a bit of both, of course, but it’s important to explore what the world might be worried about.
The obvious answer is that investors are worried about the same things we’ve been talking about for a couple of years in these pages. In fact, none other than the IMF, in its semi-annual report on the world’s markets, states that the era of ultra-low to negative interest rates has encouraged massive debt creation.
I’ve been focusing on the towering sovereign debts that have been amassed, but this report from the IMF notes a ticking time bomb in corporate debt.
Tobias Adrian and Fabio Natalucci, the senior IMF officials who authored the report, note that “We look at the potential impact of a material economic slowdown — one that is half as severe as the global financial crisis of 2007-08. Our conclusion is sobering: debt owed by firms unable to cover interest expenses with earnings, which we call corporate debt at risk, could rise to $19tn. That is almost 40% of total corporate debt in the economies we studied.”
So add this to a list of concerns that includes not only the aforementioned pile of unmanageable sovereign debt, but also the derivative exposure of the Too-Big-To-Fail institutions that Alan Greenspan warned me about...the surge in negative-yielding debt worldwide...the Fed’s recently announced return to QE (but please don’t call it that!)...the warning signs of an economic slowdown in the U.S....
...Plus all the geopolitical issues that remain unresolved, and you have quite a gumbo of worries simmering on the stove.
Could it simply be so many issues humming away in the background that is keeping the world on edge and fueling demand for gold? Or is there one single crisis on the horizon that no one can individually express but that the golden barometer is sensing?
No telling at this point. But we may know soon.
All the best,
Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference
P.S. Once again, it’s important to remember that we’re in a confirmed gold and silver bull market, and yet junior mining shares are still near bargain-basement levels.
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