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February 12, 2017

Gold, The Greenback And The Trump Factor

It’s notable that Gold jumped $17 an ounce last week amid further ETF inflows while the U.S. dollar also gained ground at the same time as all the major North American stock indices hit new record highs.

Things are moving at “Trump speed”!

Given the behavior of the Venture, we predicted the $1,200 level for Gold would be a springboard rather than a brick wall.  So far, that call is looking good.  This morning we have a fresh chart for Gold that shows you what to watch for this week.

There’s too much chaos around the world, even just within the United States, for Gold not to behave bullishly this year.  Too many analysts have not been thinking “outside the box” – they’ve been fixated on the assumption that the Fed is going to raise interest rates 3 times during 2017 and Gold will suffer as a result.  End. Of. Story.

Of course it’s never that simple…

It’s going to be a tumultuous year in the United States, and around the world, as Americans and others adjust to the new Donald Trump era and how he’s introducing transformational change with respect to how government should operate.  Gold loves uncertainty and chaos, and it’s going to get plenty of it in 2017 throughout the globe thanks to a Trump Tsunami.  We also expect to see heightened tensions between the United States and Iran – undeniably bullish for both Gold and Oil.

Then there’s the issue of U.S. debt – one thing the mainstream media and the markets aren’t focused on right now.

While Trump will definitely find significant savings and new efficiencies in certain operations of the federal government, we don’t see how he can fulfill his agenda without expanding the budget deficit and pushing total debt above $20 trillion (currently $19.9 trillion) – at least during the next couple of years.  How can that not be Gold-bullish (it always has been in the past)?  The administration’s first budget could be an important catalyst for Gold – we’ll see.  Keep in mind, Trump isn’t afraid of debt.  In fact, he has described himself as the “King of Debt”.

We’re sometimes criticized for bringing politics into market analysis but investors must understand you can not separate the two, especially now given how transformational the Trump administration could be.  How the U.S. dollar, Gold and commodities in general behave in the coming months will be very much dependent on the new policies and approaches that flow out of Washington, like it or not, especially in areas such as government spending, regulations, trade, energy, health care and infrastructure.  Trump’s agenda will also create new trends around the globe.

Meanwhile, the current behavior of the Venture seems inconsistent with the idea that we’re currently seeing in Gold is a “dead cat bounce”.

ETF selling, the driving factor in Gold’s post-election swoon, has dried up and fresh inflows have started.  If that trend continues, and the physical market picks up in Asia, Gold could power north to $1,300 or higher in a hurry.  Then everyone will understand what last year’s accumulation was all about!

Gold 2-Year Weekly Chart

Gold is taking direct aim at its 200-day moving average (SMA) in the $1,260’s.

Importantly, Gold’s 50-day SMA has reversed to the upside which ends a decline that started last August.   On a shorter-term chart, we’ve demonstrated how Gold has been traversing recently within a resistance band between $1,215 and $1,235.  At some point, perhaps very soon, Gold is going to smash through the top of that band and challenge the 200-day in the $1,260’s.  Bullion gained $5 an ounce Friday to close at $1,233.  One can’t rule out a near-term test of the $1,215 level but the risk-reward ratio for Gold right now has to be considered highly favorable.

Sell pressure (CMF) on this 2-year weekly peaked late last year – watch for a transition into buy pressure, perhaps before the end of this quarter.

It’s dangerous to be a crowd follower and during the last couple of months of 2016 the masses turned very negative toward Gold because the uninformed mainstream (propaganda) media kept repeating the narrative that if the Fed is in a rate hike cycle mode, this is bad for bullion (despite historical evidence to the contrary).  The dollar, meanwhile, got a double whammy benefit from Fed hawkishness and new political leadership in Washington that markets initially interpreted as being very bullish for the currency.

U.S. Dollar Index

President Trump is determined to “win on trade” for the United States and that’s an approach a President should take.  As investors, what’s important for us to discern is that it’s going to be much more difficult for Trump to achieve that objective if the American dollar is surging.  Hence, just before assuming office, he took a swipe at the “high” dollar in a January interview with the Wall Street Journal.

The Dollar Index broke out aggressively in early October and momentum peaked in November, though price highs weren’t reached until December.  The best indication of a weakening trend was the divergence between RSI(14) and price after the index finally touched measured Fib. resistance at 103.69.

A breakout above 104 could lead to a runaway dollar, but we now see much less likelihood of that occurring anytime soon given Trump’s concerns about the currency.  That’s probably why the Venture is up nearly 18% from its December low.

In addition, investors who are currently trading on the idea that the central bank will raise rates 3 times in 2017 have very short memories – this is the same Fed that expected to raise rates 4 times in 2016!  They struggled to implement just 1 rate hike, something they may not have been able to do if the November 8 elections had gone a different way.  Keep in mind, as well, that U.S. 4th quarter GDP came in quite a bit less than expected at just 1.9% as soybean exports fell.  When the American economic performance is dependent on soybeans, you know something’s wrong.  Trump has a big mess to fix.

While the Trump administration’s plans for major regulatory relief as well as individual and corporate tax cuts is a welcomed pro-growth agenda after 8 years of Obama steering a path toward socialism, traders are probably over-estimating how quickly these new policies will actually contribute to GDP growth.  It took more than a year before the Reagan Revolution jump-started the economy in the early 1980’s, and Reagan didn’t face the kind of opposition that Trump does right now.  From repealing and replacing ObamaCare to “fixing” trade agreements, the blue collar billionaire and his team face some daunting challenges.  We predict that Trump will succeed – “winning” is in his DNA, but it’s going to take time for all of the administration’s changes to be implemented and work their way through the system.  Increasingly during 2018 we expect the economy will respond positively.  Most new Presidents have had to battle weak economies or even recessions at the beginning of their terms.

Weakness started creeping into the Dollar Index in December when an RSI-price divergence materialized, and now the index is fighting a declining 50-day SMA.  It’s quite possible there could be an RSI(14) breakout above a downtrend line in the coming days and a continuation of last week’s rally.  The bottom line, however, is that the Dollar Index is now constrained below the key 104 level – positive for both the commodity sector and the Venture.

5 Comments

  1. It will be very interesting to see what gold does over night Sunday on the actions of North Korea, pushing the trump buttons, that was excellent news from GGI on Friday, the top is now set, this will now perk up the ears of big money and consistent news flow appears to be here. Great job guys on handling your crash, look forward to next week..

    Comment by Tombc — February 12, 2017 @ 9:36 am

  2. ” the trumpster you call a ‘blue collar billionaire, he being born with silver spoons in his mouth?? Billionaire wall street folks in his cabinet, and he vowing to cut taxes for the poor uber rich.?
    Now, that’s rich.

    Comment by Carl — February 12, 2017 @ 5:47 pm

  3. Carl, how would you explain Trump captured most of the union vote?

    Comment by Jon - BMR — February 12, 2017 @ 5:55 pm

  4. That comparison looks sweet, wow!

    Comment by Tombc — February 12, 2017 @ 6:26 pm

  5. ESKAY PROCEEDS WITH LOI WITH SILVER STANDARD TO OPTION UP TO A 60% INTEREST IN PART OF SIB PROPERTY

    Further to its press release dated Jan. 26, 2017, St Andrew Goldfields Ltd., a wholly owned subsidiary of Kirkland Lake Gold Ltd., which holds a 20-per-cent undivided interest the SIB property, has waived its right of first refusal and Eskay Mining Corp. will proceed to negotiate the terms of a formal agreement for the option of up to a 60-per-cent undivided interest in part of the SIB property to Silver Standard Resources Inc., the senior mining company referred to in the Jan. 26, 2017, press release.

    The part of the SIB Property subject to the Option consists of 30 mining claims representing approximately 4823 ha or approximately 10% of the SIB Property land package (the “Optioned Property”). Eskay holds an 80% undivided interest in the SIB Property pursuant to a joint venture agreement (the “JVAgr”) with St Andrew. The remainder of the SIB Property will remain subject to the terms of the JVAgr between Eskay and St Andrew.

    The Optionee can earn a 51% undivided interest in the Optioned Property by completing a $300,000 private placement into Eskay at $0.20 per share, subject to the rules of the TSX Venture Exchange (“TSXV”), and expending $11.7 million on the Optioned Property over three years ($3.7 million in the first year and $4 million in each of the second and third years of the Option). In the event that the price of gold does not meet certain thresholds in any option year, the Optionee has the right to reduce minimum expenditures to $2 million in such option year and the term of the Option will be extended for a further year, subject to the requirement by the Optionee to spend at least $10 million in the first three years of the Option (in accordance with the terms of the JVAgr). Once a 51% undivided interest is earned, the Optionee can either proceed to form a joint venture (with the Optionee holding 51%, Eskay holding 29% and St Andrew holding 20% (assuming they contribute their pro rata share of expenditures on the Optioned Property)) or exercise a second option to earn a further 9% undivided interest in the Optioned Property for an aggregate 60% undivided interest (with the Optionee holding 60%, Eskay holding 20% and St Andrew holding 20% (assuming they contribute their pro rata share of expenditures on the Optioned Property)) by either delivering a Preliminary Economic Assessment or completing 23,000 m of diamond drilling on the Optioned Property. Eskay has a carried interest during the Option term but St Andrew must either contribute its pro rata share of expenditures or be diluted. If St Andrew is diluted to a 10% or less interest in the Optioned Property, it will be converted to a holder of a 2% net smelter returns royalty in the Optioned Property. Once a joint venture is formed, Eskay will be carried (the “Eskay Financing”) for any joint venture expenditures in respect of the Optioned Property it would otherwise be required to make until the earlier of a production decision by the Technical Committee or an aggregate of $10 million in expenditures has been made on its behalf (for example, if Eskay held a 20% undivided interest in the Optioned Property on the formation of the joint venture, it would not be required to fund its 20% undivided interest until an aggregate of a further $50 million had been spent on the Optioned Property). The Eskay Financing, with interest, is repayable by Eskay out of 100% of Eskay’s free cash flow from production of the Optioned Property.

    The Option is subject to a number of conditions including certain technical amendments being made to the JVAgr, the grant of certain rights of first refusal to the Optionee, the execution of a formal Option Agreement, TSXV approval and such other conditions as are usual for a transaction of this nature.

    For further information regarding the SIB Property, see the companies press releases of October 17, 2016, August 8, 2016, May 9, 2016 and January 23, 2013.

    About Eskay Mining Corp:

    Eskay Mining Corp (TSX VENTURE:ESK) is a TSX Venture Exchange listed company, headquartered in Toronto, Ontario. Eskay is an exploration company focused on the exploration and development of precious and base metals in British Columbia in a highly prolific, poly metallic area known as the Eskay Rift Belt located in the “Golden Triangle”, 70km northwest of Stewart, BC. The Company currently holds mineral tenures in this area comprised of 177 claims (130,000 acres).

    Comment by Jon - BMR — February 13, 2017 @ 6:21 am

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