Gold: What? Me, Worry?

Gold: What? Me, Worry? by Adrian Day for StreetWise Reports

First, we have a word on gold. Gold closed under $1,800/ounce on Friday for the first time since mid-July. How did it happen? Gold had declined sharply for the past week, but on Friday, just before the U.S. open, it dropped below its 200-day moving average (dma), setting off a series of stops. Many traders watch this level and place stop losses just below the 200-dma. Happening on a thin, post-holiday trading day, ahead of a weekend, made it worse. This certainly does not necessarily presage further declines.

The last time gold violated its 200-dma were a coin toss as to what happened next. It bounced back within three to five days on as many occasions as it was down for months after. So, as a predictor for more than a couple of days, it’s useless.

A confluence of factors provoked gold’s recent declines: COVID vaccines; the lack of stimulus; a turn-up in the broad market (and a little more certainly on the election?)—all of which are negative for gold. But we had all of them at a time when gold was already soft, and at a seasonally weak period (end October/November) making the downturn worse.

Will Congress cut back its spending? Will the Fed stop “printing money”?
However, for me the central questions going forward are these: Is Congress going to continue spending, and is the Fed going to continue accommodating unfunded spending?

We may not see a multi-trillion dollar “green new deal,” but there will be plenty of spending ahead: cancellation of student debt; bailout of bankrupt states; support for people about to get evicted, etc. A Citibank analyst notes, “The vaccine can kill the virus, but it can’t kill the mountain of debt.” With Yellen at the Treasury and Powell at the Fed, we have a duo that supports Modern Monetary Theory, in practice if not in theory. This is wildly positive for gold.

As for the stocks, as many were up on Friday as down, notwithstanding the sharp drop in the gold price, suggesting investors are seeing good value in the equities after three weeks of declining prices. Gold stocks typically bottom, after a weak October and November, in early or mid-December. That stocks rose Friday while gold fell is one more indication that the gold market declines may not last long.

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