In late November, I made the case for buying gold. At the time, we got data that China’s central bank had resumed gold purchases. We were also dealing with US election uncertainty and — most importantly — the strong seasonal trend in gold.
Gold was trading at $2620 since then and it caught a remarkable bid in the ensuing weeks, climbing to $2953 this week.
Now, there are signs it’s running out of steam. First is that it’s repeatedly failed near $2950. I thought it might be pulled to $3000 but that’s now looking less likely and even if it gets there, the risk-reward isn’t great.
Gold daily
More importantly, the fundamentals are shifting. Here are some looming changes:
1) The Ukraine war is ending
You can consider it over now and one of the (only) predictable things about Trump is that he doesn’t like war. If that’s the case, then a more peaceful world is a drag on gold.
2) Inflation back?
The Fed is losing the impetus to cut rates and a shift in inflationary fortunes could prompt assets everywhere to reset. High or low inflation hasn’t had a great correlation with gold prices but a risk-off retreat on a more-hawkish Fed would hurt.
3) Bitcoin has fallen 20%
Bitcoin is in a real pullback. At time gold and bitcoin compete for dollars and gold is winning at the moment but by and large both of theme compete with the dollar and should move in the same direction.
4) Tariffman has disappointed
A big tailwind for gold after the election was the idea that Trump would put on strong tariffs. He is continuing to talk tough but so far he’s only hit China with 10% tariffs. The market isn’t buying his threats anymore and if tariffs aren’t used, then gold is less attractive.
5) Chinese investors have found something new
I’d argue that much of the gold rally in the past two years was driven by Chinese investors looking for somewhere safe to part money due to the implosion in real estate and dead money in stock markets. Now, Chinese stock markets are hot again and that should see money flow out of gold and into equities, particularly if the National People’s Congress next week delivers stimulus.
6) The fiscal hawks might be back
My 80% baseline is that Congress passes the Trump tax cuts and continues to run huge deficits but there is a chance the fiscal hawks block it and the US tightens up. That would cause some recessionary headwinds but put the US back on the path to fiscal sustainability.
7) The seasonal trade is done
Once again it was a beautiful trade. It’s one of the all-time great seasonal trades and I’ll be back in it next December but it ends at the end of February and that’s that.
There are some risks in the other direction too. Tariffs could come, the US dollar appears to be weakening, China’s recent bounce could be a dead cat.