Last week gold broke through into a new trading range. GLD, our ETF gold trading proxy, broke above 126 and bounced off 128. People say gold is difficult to trade and hard to understand, which can be very true for the short term. But in retrospect, gold prices painted a fairly simple picture these last couple of months.
What the chart shows is a fairly standard range-bound situation pretty much through August. Then came a breakout, which has continued through last Friday. Confusing signals led many traders to stay mostly on the sidelines, which may yet turn out to be a good thing.
The real question is: What happens next?
And the answer is: We don’t know!
When an equity breaks into a new trading range, trading logic would demand you put on a small position, or tighten up your stops to protect any paper profits. That’s the technical side, what about the fundamentals?
North Korea and hurricanes Harvey and Irma are often cited for “causing” the recent gold run-up. In reality it’s not those events themselves but the implications and fallout that count. The North Korean situation creates a lot of instability, so people want to hunker down and store wealth in safe-haven assets. This behavior should persist even if their local situation goes awry.
The hurricanes are a bit more subtle. The effect on gold prices is not directly due to the destruction, but where the clean-up and recovery funding comes from. Usually in big natural disasters, the federal government throws a whole lot of money and people at the recovery effort. Since we’re not running a Federal budget surplus right now, this means increasing the deficit. This in turn reduces overseas confidence in the US dollar.
And this, of course, results in an increased value for gold in dollars.
While some analysts and prognosticators are predicting $5000 gold in the coming years, your friendly Gold Enthusiast is still taking a longer-term and possibly more rational view. The factor we tend to forget in times like this is that politicians will do whatever they have to to stay in power. This has been true for so long it’s almost a basic law of physics. They’ll play card-shuffling and bean-hiding tricks all day long in their efforts to kick intractable problems down the road, and into someone else’s term in office.
Yes, Harvey and Irma are going to cost a lot of money. And, national politicians are likely to enact huge relief funds to help the people affected. But, we’ve been down this road before, and gold prices typically back off if the most recent disaster wasn’t as bad as expected. So, with Irma thankfully not destroying Florida to the extent predicted, we can expect the metal to decline this week. Short-term trades might see some losses, but keep the long game in view and you should do just fine.
Signed, The Gold Enthusiast
DISCLAIMER: The author has no positions in any security mentioned in this article. The author is long NUGT and JNUG, and may trade these at any time in the next 48 hours.