Gold Upleg Breaking Out

Gold’s strong upleg accelerated this week, powering to major new breakout highs. Speculators rushed to buy gold futures following surprising weak-dollar comments from the US Treasury Secretary, which hit the US dollar hard. That boosted gold to critical technical levels that should really intensify the shift back to bullish psychology. This mounting gold breakout confirms gold’s bull market is very much alive and well.

While this week’s surge put gold on many more traders’ radars, it has actually been picking up steam for 6 weeks now. Gold’s latest major interim low of $1242 came a couple days before the Fed’s latest rate hike in mid-December. The gold-futures speculators who dominate this metal’s short-term price action have always had a deep and irrational fear of Fed rate hikes. Historically gold has thrived in rate-hike cycles!

Leading into that fifth rate hike of this current cycle, these hyper-leveraged traders aggressively dumped longs and ramped shorts at record levels. That battered gold lower while exhausting potential selling. So once the Fed hiked as expected, and didn’t up its 2018 rate-hike forecast from the prior quarter’s three more, these excessively-bearish traders started buying back in. This pattern was seen around past rate hikes.

So two trading days after this latest rate hike when gold was still at $1256, I published an essay outlining why that hike was so bullish for gold. It concluded, “… Fed rate hikes are bullish for gold, and this week’s is no exception… After each past December rate hike which gold-futures speculators sold aggressively into, gold dramatically surged in the subsequent months.” And that’s indeed exactly what happened since.

By the final trading day of 2017 gold had already surged 4.9% out of its pre-rate-hike interim low. Those strong gains continued in this young new year despite these extreme mania stock markets retarding gold investment demand. By this Tuesday, gold’s new upleg extended to an 8.0% gain over nearly 6 weeks. Since the Fed’s rate hike, gold had rallied on 19 out of 27 trading days. Upleg momentum was already building.

Every January the ultra-exclusive World Economic Forum is held in Davos, Switzerland.  It attracts the world’s most powerful people, from CEOs to top political leaders to billionaires. The financial media flocks to the Swiss Alps to interview these leading movers and shakers. One of this year’s attendees is Steven Mnuchin, Trump’s Treasury Secretary.  He gave an interview in Davos which shocked currency traders.

Mnuchin told reporters, “Obviously a weaker dollar is good for us as it relates to trade and opportunities.” That’s certainly true, as it’s easier for American companies to export around the world when their goods are less expensive due to a lower dollar. But Treasury secretaries have a long tradition of never saying anything about the dollar beyond that they “support a strong-dollar policy”. So Mnuchin’s candor was unexpected.

Mnuchin had made similar comments last year that didn’t affect markets as much. But the combination of this past year’s strong dollar downtrend and a couple more developments that day triggered big US dollar selling. The US had just slapped tariffs on imported solar panels and washing machines hours earlier. Trump’s Commerce Secretary Wilbur Ross spoke alongside Mnuchin at that Davos conference.

Ross warned more trade measures were coming. When asked about trade wars he replied, “Trade wars are fought every single day… So a trade war has been in place for quite a little while, the difference is the US troops are now coming to the rampart.” There’s no more efficient way to boost exports and execute trade wars than jawboning the local currency lower.  All this together really struck home for currency traders.

So the US Dollar Index plunged 1.0% on Wednesday following those comments, hitting its worst levels in 3.1 years. Incidentally, this past year’s dollar weakness shouldn’t have surprised anyone. Back in late December 2016 when dollar euphoria reigned as the USDX traded at a 14.0-year secular high, I wrote an essay on the unsustainability of those extremes. I warned of “a major topping underway” before a new bear.