AGE's Gold Commentary

AGE Gold Commentary is our regular report analyzing trends in precious metals and rare coins. We monitor domestic and international markets and extrapolate from our 30 years in metals to place current events into a hard asset perspective. View archives.

2/9/2017: Gold surges on fading Trump Bump

Source:

Fading Trump Bump
Charts and changing trends
Superb values in coins & bullion

For the second January in a row, precious metals started the New Year on a tear. Rebounding strongly from cyclical lows in December, gold is now up 9% and silver 12% so far in 2016, while platinum and palladium have jumped 13% and 18%, respectively. The U.S. dollar, after surging more than 4% after the election of pro-business Donald Trump, has given back all those gains. Dollar strength pressured metals in December, and now dollar weakness is buoying them higher.

In the months following Trump's election, the dollar rallied to a 14-year high and the Dow punched above 20,000 for the first time ever. Enjoying the so-called Trump Bump, both markets were driven largely by speculation that Trump's campaign promises to spend $1 trillion on infrastructure while slashing taxes and regulations would spur growth and inflation.

Fading Trump Bump

Both rallies have since stalled as speculative exuberance has given way to caution and the Bump has begun to fade. Details on Trump's economic plans have been in short supply, while a series of controversial positions on trade, diplomatic relations, and immigration have dominated the news.

The President may be delivering the disruption he promised but one result has been rising anxiety in the markets. The CBOE Volatility Index, which measures expectations for large swings in the S&P 500, jumped 18% to a five-month high in January. The dollar has fallen for three straight weeks and gold has been surging on the growing uncertainty. And may be just the start.

Let's look at the charts.

Charts and changing trends

U.S. Dollar

On the dollar chart below, you can clearly see the Trump Bump emerge in December 2016, with the dollar punching through major resistance at 100.50. This is a level it had failed to surpass during its two previous peak highs. The first one came in early 2015, after the economy posted the three strongest quarters of GDP growth since the financial crisis in 2008. The second peak came in late in 2015, when the Fed raised interest rates for the first time in nine years.

Already surging on euphoria over Trump's pro-business agenda, the dollar spiked to new 14-year high above 103 after the Fed raised interest rates in December. It was the first hike since the previous December and the second in 10 years. Higher rates boost the dollar by attracting foreign exchange investment seeking higher yields.

Much of the post-election Bump has now reversed. The dollar has fallen from a 14-year high to a three-month low, dropping below major upside resistance at 100.50 to as low as 99.4 so far. Markets are still waiting for details on pro-growth policies, and it is unclear whether his promised $1 trillion infrastructure program will become reality. The Congressional Budget Office estimated last month that federal debt is already projected to grow by $10 trillion over the next ten years, driven by Social Security and health care for aging baby boomers.

We have good reason to believe the strong dollar will not last. First, economic growth is just muddling along. Last year GDP rose by just 1.6%, and forecasts for Q1 2017 are around 2.7%, well under Trump's promise of 4% growth. That means the Fed may not be able to raise rates three times this year, as it has suggested it will, without choking off growth.

Indeed, the new administration appears to prefer a weaker dollar. In an interview with the Wall Street Journal in late January, Trump said explicitly that the dollar has become "too strong," especially in relation to the yuan, "and it's killing us." His Treasury nominee, Steven Mnuchin, went on record saying a strong dollar may hurt the economy. And Peter Navarro, head of Trump's National Trade Council, said last week that the "grossly undervalued" euro gives Germany an advantage over the U.S. in exports.

Adopting a weaker dollar policy makes sense, given the stubborn softness in U.S. manufacturing and the growing U.S. trade deficit, which widened to a four-year high in 2016. A weaker dollar will help U.S. exports to compete overseas, help rebuild U.S. manufacturing, and help the President fulfill his promise to bring home factory jobs. It will also be quite bullish for gold and other commodities by making them less expensive to users of other currencies.

Gold

Last year, gold got off to a roaring start as Europe and Japan introduced negative interest rates, driving investors into the metals as a hedge against currency risk. Prices consolidated into a $1,210 to $1,295 trading range, then punched up to $1,372 in early August on worries about how the Brexit vote would affect the European Union. Uncertainty over rate hikes and politics kept prices volatile in the fall. And while the speculative Trump Bump in stocks and the dollar pressured gold in Q4, the metal still finished 2016 with an impressive 8.5% gain.

As 2017 begins, it looks like déjà vu all over again. Gold and silver are rebounding strongly off December lows. Negative rates and monetary easing still dominate the Eurozone and Japan. Upcoming elections in France, Germany, and Holland could determine the fate of the EU. And uncertainty in the U.S. over interest rates and politics are continuing to support demand for safe havens.

Moving forward, gold has entered a renewed $1,180 to $1,250 trading range with the bias toward higher prices. Remember, anything is possible, especially surprises to the upside, as President Trump’s unconventional administration gains momentum. He clearly has no qualms over upsetting the fiscal, domestic or international apple cart for whatever reason.

Silver

Like gold, silver is rallying powerfully into the New Year. From the December low of $15.79, it has reached as high as $17.85, and is up 12% so far this year. As you can see on the three-year chart below, when silver weakened in December on the Trump Bump, it barely dipped below the lowest horizontal green and red support and resistance line at $15.90, like it did during 2015’s weakest moments. Based on these higher lows, it is increasingly likely that $13.65, the December 2015 low, will prove to be a major long-term bottom for silver.

Silver is now filling in the right shoulder of a major inverse-head-and-shoulders pattern with the neckline at our upside resistance level of $17.90. If it can move over this price-point, silver has a very strong likelihood of consolidating recent gains over $18.

Even if it doesn’t hold about $18 on this rally, we see short-term support for silver at $16.50 and again $17.00, with a new trading range developing between $16.50 and $18.50, based on previous support and resistance points. Our upside target for silver in 2017 is $22.20 to $22.70, which is $1.50 to $2 above its 2016 peak of $20.70.

Great values in classic gold coins

We highly recommend adding to your physical positions while prices for precious metals remain relatively low. For bulk gold buyers, we highly recommend classic European gold coins. We have a good selection now, and premiums are lower than normal, so they offer a great buying opportunity.

British Gold Sovereign “Kings”

British Gold Sovereign “Kings” (BU) are currently on special at $4 off per coin. We seldom run specials on these extremely popular coins from the early 20th century because of limited availability. Eurozone problems like Greek debt crisis and Brexit have repeatedly caused supplies to dry up and premiums to spike higher in recent years. With potentially destabilizing elections pending in France and Germany this year, these coins could disappear quickly from the market. We urge you to take advantage while we have coins in stock and premiums remain unusually low.

2017 U.S. Platinum Eagles

Many of you took advantage of our Investor Alert on 2017 U.S. Platinum Eagles two weeks ago. Congratulations and thank you! Platinum continues to grind higher but it is still trading at about a $210 discount to gold, which is historically unusual. We still have a few 2017 dated 1-ounce U.S. Platinum Eagles (BU) available, as well as a handful of perfect, PCGS-certified MS70 First Strike coins. Please call for pricing on the MS70 coins.

$10 Liberty Gold Eagles in MS63

For buyers of pre-1933 U.S. gold coins, we highly recommend the $10 Liberty in MS63 condition right now. Pricing at just a few dollars more than MS62 specimens, MS63 coins offer more than double the overall scarcity, with around 81,000 known survivors! Plus, we have some pre-1900 dates available at no additional cost.

Trading at under $900 per coin today, these coins are near cyclic lows in price and offer tremendous value. During six of the last eight years, they've traded above $1,500 per coin, with a market peak of $1,840 in 2009. They receive our highest recommendation.

That’s all for now. Thank you for your time and business!

Sincerely,

Dana Samuelson, President
Bill Musgrave, Vice President

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