Gold has turned modestly defensive intraday following a round of positive U.S. economic data that buoyed stocks. However, the shadow of U.S. political uncertainty continues to hold sway on markets.
The yellow metal remains above the 200-day moving average and more than 61.8% of the entire decline from 1295.03 to 1213.60 has been retraced. This presents a generally favorable technical picture, which bodes well for the underlying uptrend that emerged in the wake of last December’s Fed rate hike.
With new accusations against the Trump administration surfacing on a daily basis, the President’s economic agenda may be severely hamstrung. They will be spending an inordinate amount of time and energy defending themselves, rather than advancing key legislation.
The dollar has already retraced all of its post-election gains. It is not unreasonable to think stocks may suffer the same fate. That would equate with about another 13% decline in the DJIA from the present level.
As doubts about fiscal stimulus and tax reform grow, Fed rate hike expectations have steadily eroded. The CME’s FedWatch tool now puts the probability of a 25 bps hike in June at 64.6%.
Even as growth risks mount, the Fed announced yesterday that household debt grew to a record high of $12.73 trillion in Q1. The previous high was established in Q3-08, just as Lehman Brothers collapsed and the financial crisis really gained momentum.
At its core, the financial crisis was a debt crisis. Policymakers the world-over — and seemingly U.S. households as well — opted to paper over the crisis with more debt. When the next crisis erupts, I’m not so sure the policymakers will be able to pull us back from the brink because the debt loads are so significantly higher than they were in 2007-2008.
Be prepared. Buy gold.