Gold Back Above $1300 – Trump Cancels Historic Summit – Silver “Ready To Breakout”

Trump surprised markets by cancelled the upcoming meeting with North Korea on Thursday, citing the recent ‘anger and hostilities’ in recent statements as the reason for the withdrawal. US Yields tumbled on the news (back below 3%) with the precious metals complex benefiting from the safe-haven buying, and gold jumping back above $1300.

One week relative performance

Table courtesy of finviz.com - Click to enlarge

With the data clearly pointing to a slowing economy, it was interesting to note the latest FOMC Minutes.

In the statement released on Wednesday, the Fed noted a ‘modest inflation overshoot could be helpful’, and more importantly that ‘it may soon to change forward guidance’.Given these admissions, is the Fed giving the best hint yet that they are willing to stoke inflation in an attempt to revive a faltering economy?

On economic data, New and Existing Home Sales for April came in less than expected, with New Sales reporting 662k vs 680k, and Retail Sales reporting 546k vs 556k. Perhaps the weaker data is a sign higher rates in the US are starting to deter buyers. Jobless claims in the US rose for the 2^nd straight week, with 14,000 more people filling for unemployment insurance. The only data point to buck the trend was the Core Durable Orders rising 0.9% vs 0.5%. However, when you strip out military spending, capital orders actually fell last month.

As we have reported before (see link) with a relatively high US 10-Year Yield (when compared to other G10 countries) and a strong US dollar, at some point the divergence will become too great. The Fed will likely be forced to realign to a more accommodative global policy.

In other markets this week, crude Oil was one of the worst performers, ending down almost 5% on reports from Opec of plans to boost production. While the industrial metals of platinum, palladium and copper all ended higher (around 1-2%), which was strange given the stronger Dollar Index (up 0.6%), and the weaker than expected economic data. Such a move in the industrial complex questions whether we are heading into a late cycle growth period, similar to the late 1970’s, where commodities move higher, despite the data, stocking inflation along the way.

While its too early to say for sure, the evidence is clearly pointing to a stagflationary outlook. And following on this trend, it was interesting to hear the latest view from JP Morgan, where their head of emerging markets, Luis Oganes, would “Not surprised if gold surpasses the $1,700/oz target set for next year.” and “Bullishness is related to the fact that US’ expansionary phase is in the late cycle where gold has historically rallied even after business cycle starts to turn.

In Italy, the Anti Establishment ‘5 Star’ and far right ‘Lega’ look set to take power. The market continues to be unimpressed with the prospect of an Anti Establishment party ruling over one of the Euro’s founding members, with the yield on the Italian 10-Year continuing to push higher.

The European marketplace seems to be particularly concerned with the coalition’s plans to boost spending through issuing ‘Mini-Bots’. A funky name, but a ‘Mini-Bot’, is just an Italian Treasury Bill, with the name a play on the word ‘Buoni Ordinari del Tesoro’.

What is interesting about this form of funding, is unlike traditional Treasury bills, that are simply an electronic book keeping entry, the Mini Bot, will be physically printed by state lottery presses – so Italy will be quite literally ‘printing money’.

The Mini Bot will be smaller in denomination, compared to traditional Treasury operations, ranging from €1-€500. In addition, the notes will have no interest coupon, nor maturity date, meaning they can circulate with the Italian economy as essentially a parallel currency.

The concern for Europe is the potential for these notes to function in the wider economy, with holders bartering their Mini Bots at a discount against the face value for a wider range of goods and services – a potential scenario that would threaten the stability of the European Union.

Given this daunting prospect for citizens holding Euros, perhaps now is a good time to protect their future purchasing power, and take some of their wealth offline (link).

Italy General Government DEBT 1950-2018

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From a technical perspective, gold is recovering strongly after dipping below the 200 dma, a trend noted in last week’s article (link). The key test will be see whether it can hold above $1300, and settle back above the 200 dma (currently at $1308, see below)  in the run up to the June FOMC meeting, especially given gold’s tendency to sell off in the weeks leading up to the announcement.

In silver the situation is even more interesting with both the 50 and 200 week moving averages now at the same level of $16.74. This alignment of the moving averages is further evidence of building energy in the silver market, that when it breaks will likely bring a sizeable move.

For investors sitting on the side lines, sure silver may drift 2 or 3 % lower to the bottom of the range from here, but given the upside potential of when is does finally break, do you really want to take the chance of waiting?

Gold Continuous Contract 2017-2018

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For investors not already positioned, now is a good time to be accumulating physical silver, especially given the low premiums over spot. And for those investors still waiting, just remember that while silver volatility has been low recently, when silver does finally breakout it usually happens very quickly leaving many people behind.

Silver Continuous Contract 2016-2018

- Click to enlarge