Gold dropped well below $1,400 on Monday. Mainstream analysts said sell-off was because hope for a resolution in the trade war interjected some optimism into the markets, pumped up risk sentiment and put a damper on safe-haven buying. But that optimism apparently faded fast. On Tuesday, gold began to rally again and pushed back above $1,400.
The fact is economic realities don't support optimism.
In his latest podcast, Peter Schiff said he sees a lot of days with big moves up for gold in the future because the yellow metal has a lot of catching up to do.
President Trump continues to insist that the US economy is the strongest ever, despite the continuous flow of weak economic data. Peter said the president's hypocrisy frustrates him.
One of the things Trump does is he calls out the media for spreading fake news. But the problem is he spreads fake news too. When he is talking about how we have the strongest economy ever, that's fake news. So, you can't live in a glass house and then throw stones, and that's what the president does.
The 10-year US Treasury yield fell again Tuesday. The 30-year fell as well, but not to the same extent. As Peter pointed out, the spread between the 10-year and the 30-year is actually getting wider.
The reason it is widening is because the markets are factoring in that higher inflation that you would expect between the 10-year and the 30-year. Of course, once the markets figure out just how much inflation we're going to get, the yield curve is going to continue to steepen, but with yields rising not with yields falling. Because right now, the markets are fixated on a weakening economy and he fact the Fed is going to cut rates.
Gold made a huge move up on Tuesday, gaining around $34 on the day. That's about a 2% swing up and down over a two-day period. As Peter noted, we don't normally see this kind of volatility in the gold market. But he said he thinks we're going to see more days like Tuesday with big gains.
I think gold has a lot of catching up to do to be where it needs to be given how wrong the market expectations were regarding the Fed's ability to shrink its balance sheet and normalize interest rates, and how wrong the markets are in their anticipation of where future inflation is likely to be and where the dollar is likely to be. So, we're going to get some big moves up in the price of gold as far as catch-up.
Peter said that while unusual, the volatility makes sense right now as gold is just beginning to break out of a six-year range.
It's basically flushing out the sellers. Some people still want to believe that there's resistance and that they can still make money on the short side. But I think more people are stepping in. More buying is coming into the gold market and it is overwhelming those sell orders.
Peter pointed out that the big selloff in gold on Monday was in reaction to a trade deal even though there was no actual trade deal.
First of all, gold prices going up have nothing to do with the trade war between the US and China. I mean, the extent that the trade war weakens the US economy and causes the Fed to print even more money or cut rates even sooner, maybe there's a connection. But even if there is no trade war, even if we have a complete truce, even if we have a deal, whatever happens, the price of gold is going up because it's reacting to monetary policy. It's reacting to the fact we're about to have a rate cut. In fact, maybe the markets are beginning to anticipate this is the beginning of an easing cycle.
Peter said the day to day movement on the trade front is just noise.
It's a side-show. So, I knew that when the markets were selling off gold in reaction to nothing that it was a good buying opportunity.
In fact, on Monday Peter sent out this tweet as gold began to drop Sunday night.
Gold is selling off tonight on the news of a trade deal with China. There is no deal. All that happened is that Trump backed down from his threat to increase tariffs on Americans buying Chinese goods. Even if there is eventually a face-saving deal, it's not bearish for gold!