Trump is in Position to Benefit Gold
On July 19th,while gold was selling downtoward the $1200 region, President Trump publicly criticized theFederal Reserve’s current policy to continue raising interest rates. Goldimmediately rose $10, while the over-bought U.S. dollar made an intra-dayreversal from its highest point reached since a strong move higher began inmid-April. Trump’s remarks, inan interview with CNBC, were likely directed at pushing the dollarlower to make U.S. goods less expensive and offset some of the damage caused byreciprocal tariffs being proposed by its trading partners.
U. S. Presidentsrarely intercede when it comes to the Fed, which is an independent governmentagency but also one that is ultimately accountable to the public and theCongress. However, the current Fed monetary policy is directly in conflict withthe president’s economic goals. Last week in the aforementioned CNBC interview,Trump stated “I don’t like all of this work that we’re putting into the economyand then I see rates going up”. The president has the power to have morecontrol of the Federal Reserve and his broader economic policies argue that he willdo so.
The Board ofGovernors of the Federal Reserve is required to have seven members and it presentlyhas just three. Two of the current governors have already been put into theirpositions by President Trump and two more have been nominated by the president,which are awaitingconfirmation by the Senate. After these two are in place on theFed’s board, the president will then nominate two more, so it is possible that sixof the seven Board members will be instated by Trump.
The FederalOpen Market Committee (FOMC) has 12 members and sets the nation’s monetarypolicy, while seven of the 12 are the members of the Board of Governors. The fiveadditional members are Federal Reserve district bank presidents and one ofthese, the Fed Bank president in Minneapolis, Neel Kashkari, has already been arguingfor nofurther rate increases. The head of the Fed bank in New York was alsonominated by the president, while the other four can only take their positionsas district bank presidents if the board in Washington agrees to their hiring.
The risingU.S. dollar has been the catalyst in keeping pressure on the gold price sincemid-April and last Thursday’s price action in both gold and the dollar was furtherevidence of this. The $1200 region is strong support for gold and the worldsreserve currency has reversed from strong resistance at the 95 level on theCash Settle Index for eightconsecutive weeks. Since the dollar has been attempting to riseabove this critical resistance area, President Trump’s comments wereconveniently timed to weaken the U.S. currency and thus bounce gold from anequally important technical level.
The nextFOMC meeting will take place next week on 31 July/01 August and the market haspriced in another 1/4 point rate increase during the following meeting in lateSeptember. Supposedly, there are twomore rate increases coming this year. But with President Trump inposition to appoint more Fed Governors who may vote for a policy change insympathy with his economic vision, we could see a rate-hike pause in December.
We couldalso see more comments from President Trump regarding his dissatisfaction withcurrent Fed policy. Any hint of a more dovish posture by the Fed in the speech,or the press conference which follows the conclusion of the FOMC meeting inSeptember, would weaken the U.S. dollar considerably, thereby providing amuch-needed boost in the gold price and its miners.
Meanwhile, goldseasonality, sentiment, and the latest Commitment of Traders report (CoT) areshowing levels where major bottoms have been made in the past. Last Friday’sCoT report showed commercial traders reducing their net short positions byroughly 27% at -73,635 contracts, which is the exact level that accompanied theJuly 2017 low. After bottoming last July, gold rallied from $1204 to $1362 injust 8-weeks. There is strongsupport at $1200 on a monthly closing basis but we could see thiscritical level tested as we head into the FOMC meeting next week.
Furthermore,since the February 9th low in the GDX, the relativestrength in the miners could also be hinting at a significant bottombeing in place soon. Over the past six months, with gold nearly $100 lower, theGDX has remained above critical support at the $21 region and is down only 8% sincethe major miner ETF was a bit above $23 at $1369 gold in mid-April. Moreover,many of the quality juniors in the complex continue to bifurcate from thesector and a handful are trading at multi-year highs.
Recently,there have been many other quality junior resource stocks being sold byimpatient investors, creating opportunities for speculators with cash andpatience. It takes a lot of time and effort to find these opportunities and itis best to be on the hunt for them when the gold space is out of favor. Whenthis sector turns, the stock prices in the quality issues can move up quickly.If you require assistance in choosing the best quality juniors to invest,please stop by my website and check out the subscription service at http://juniorminerjunky.com/
By David ErfleContributing tokitco.com
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