USAGOLD/Peter A. Grant/03-31-17
Gold is trading modestly higher, but it is still off the highs of the week — set on Monday — by more than $10. With the high for the year from February at 1263.87 intact and the 200-day moving average at 1258.31, resistance is well defined.
Today’s close will mark the end of Q1: Gold appears poised to post an 8% gain. Meanwhile, the much ballyhooed stock market hasn’t fared as well since the first of the year. As of this writing, the Dow is up 4.1%, S&P500 is +4.7% and the Russell 2000 is up a scant 1.1%. The one outlier is the tech-heavy NASDAQ at +8.9%. However, silver is leading the pack at +14%.
Despite the mildly corrective/consolidative tone that emerged after Monday’s surge, the downside has been limited. Further tests of the upside seem likely amid ongoing political uncertainty, toppy-looking stocks and waning expectations about the likely number of Fed rate hikes this year.
Continued lackluster growth and a tempering of price risks has some wondering how the Fed might justify further rate hikes if these trends continue. After a modest and below expectation 0.1% gain in March PCE, the Atlanta Fed’s GDPNow projection for Q1 growth was revised back to 0.9%. Goldmann Sachs cut its Q1 GDP forecast from 1.8% to 1.5% based on the “softer pace of consumption growth in the first quarter”.
Even as St. Louis Fed hawk James Bullard kicked around the idea of reducing the balance sheet, he cautioned that Q1 tracking estimates are showing sub-1% growth. If that’s the reality, a rational central bank would not be tightening policy into such weakness.
All of this should be generally supportive to gold. However, the big driver for gold in likely to remain our ever-growing debt burden. The CBO predicts that the debt/GDP ratio will nearly double from 77% to 150% over the next 30-years. At the same time, they predict that interest on that debt will quadruple, from 1.4% to 6.2% by 2047.
This is an unsustainable paradigm. The only way for the U.S. to service such a debt at such a rate is to devalue the dollar. If the dollar resumes it’s long term downtrend, gold will resume its long-term uptrend. Now is the time to position for that inevitability.