The Daily Market Report: Gold Firm, Despite Record Stocks

USAGOLD/Peter Grant/08-02-17

Gold is firmer intraday, keeping the pressure on the 6-week high set yesterday. The yellow metal continues to garner support from a weak dollar, which edged to a new 14-month low today.

The dollar index has lost nearly 11% from the high set in January at 103.82. If support marked by the 91.92 low from May of last year, an additional 10% downside extension would not be surprising, which would have the greenback flirting with a bear market.

Eroding prospects for higher interest rates, along with eroding confidence in the ability of President Trump to advance his reflationary economic agenda are both weighing heavily on the dollar. With Congress on recess until after Labor Day, nothing is going to get done for the next 4-weeks. That does not however preclude political volatility given the President’s penchant for tweeting, recent turnover within his inner-circle and the ongoing investigations.

Despite all the uncertainty, stocks continue to rise with the DJIA achieving a record high above 22,000 today. The New York Times attributes the recent gains to “a rush of perhaps less discerning money into stocks, propelling stock market indexes past one historical milestone after another.”

“Less discerning money” is a polite reference to the retail investors who are always the last ones to pile into a frothy market. They are all-too-often the “greater fools” that provide liquidity to the exiting institutional investors at market extremes.

That does not mean that stocks are at a peak necessarily, but it is often a warning sign that we are getting close. Savvy investors know that picking a top is nearly impossible and so they tend to gradually reallocate out of risk assets into safer assets as a means to lock-in their equity gains.

As far as hedging goes, it’s better to be weeks or even months early than a minute late. Investment powerhouse PIMCO agrees that the time to tend to your hedges is now, echoing a similar set of concerns:

• There is a high level of economic uncertainty around the world, as represented by the Global Economic Policy Uncertainty Index.

• Geopolitical tensions are increasing (e.g., North Korea, Qatar, Syria).

• Prospects for much of the Trump administration’s policy agenda are unclear.

“The combination of fully valued equity markets, relatively high economic uncertainty and historically low long S&P 500 Index option prices suggests that now could be a good time for investors to consider fortifying their defenses,” said PIMCO derivatives strategist Michael Connor. I think that fortification process is providing additional support for gold.

When stocks ultimately correct — and they assuredly will — interest in safe-havens like gold will only accelerate. This may be the last opportunity to tend to your gold hedge with a 12-hadle…

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