Gold gets trumped into an overdue correction

(Kitco, Fri.  Nov. 15th, 2024) – On the Friday before election week, gold volatility had already begun to increase in anticipation of election uncertainty ending. As mentioned in this column just ahead of the U.S. presidential election on November 5, gold has been long overdue for a 5-10% correction.

The 54% surge in bullion over the past 12-months had yet to experience as much as a 5% correction heading into a chaotic U.S. election, with the overwhelming result having led to a considerable post-election downdraft.

Historically, once the gold price becomes technically extreme over-bought for a long period of time, corrections tend to be short and sharp while moving down to stronger support levels.

After quickly reaching $2800 in late October and a monthly Relative Strength Index (RSI) reading above 80, Gold Futures have strong support at $2520-$2500, which would be a 10% correction.

In the meantime, gold remains on a trend that is solidly to the upside after breaking out of an historic 13-year cup & handle pattern above $2100 in March. A move down to $2500, an all-time high just 3-months ago, would also be a healthy, long-overdue pullback of decent size for the gold price.

Fundamentally, risk aversion in the general marketplace has receded, while the decisive Trump victory has curtailed safe-haven demand for gold and silver. Following President-elect Donald Trump’s victory last week, the safe-haven premium gold experienced in October heading into the election on November 5 has now mostly been unwound.

The geopolitical escalation in the Middle East, particularly since the Hamas invasion the first week of October, has been one of the main drivers for the gold price and Trump campaigned as the anti-war candidate. Whether the Trump administration will bring about his campaign promises of geopolitical de-escalation remains uncertain.

However, there are strong indications that the incoming Republican administration will pursue a de-escalation strategy for both the Ukraine conflict and tensions in the Middle East.

Another factor behind gold’s decline since the election is Trump’s vocal support for cryptocurrencies like Bitcoin, which has surged closer to the key psychological $100,000 level this week and suggests that favorable regulations for crypto may provide a tailwind for Bitcoin. Since Bitcoin often competes with gold for investment dollars, capital has shifted out of gold and into Bitcoin since the election outcome was announced.

Moreover, the USDX moving to test key 12-month stiff resistance at 107 this week has assisted in pressuring gold, celebrating Trump’s election. Trump’s victory and all three branches of the U.S. government being Republican-controlled (plus the Supreme Court) have prompted a strong rally in the U.S. dollar index.

U.S. Treasury yields are also on the rise due to worries that the incoming Trump administration will prompt better U.S. economic growth. But with that would come higher inflation, which the bond market has already begun to price in.

Banks raised $23.5 billion by issuing investment-grade bonds on Tuesday, the biggest debt issuance by financial institutions in a single day since the beginning of 2016, as they anticipate potentially higher interest rates next year.

The sudden rise in the world’s reserve currency could also be short-lived, as there remains plenty of uncertainty as to what the President-elect would do regarding tariffs, deregulation, immigration, and taxes.

Another area of concern is Trump’s desire to control the Federal Reserve. If this takes place, it would undercut investors’ faith in the stock and bond markets. The president-elect’s allies have been crafting a playbook for how he could restructure the Fed and kick Fed Chairman Jerome Powell out before his term ends, the Wall Street Journal reported.

Attempts by government to control the world’s most powerful central bank would also send an extremely negative signal to the rest of the world. Trump will have to stay away from a clash with Powell, as that could have a negative impact on the dollar and the U.S. treasury market. But gold would benefit.

Metals traders are also concerned about less demand coming out of China. Apart from worries about a Trump administration’s impact on commodity markets, disappointment about the outcome of last week’s highly anticipated meeting of the Standing Committee of China’s National People’s Congress has added to the recent weakness.

The country’s highest lawmaking body detailed a large bond program to alleviate the mountains of debt piled up at local governments, but no new fiscal measures were announced.

Nevertheless, there is still multiple catalysts in place to take gold higher once this healthy correction has been completed. After gold broke out from a 13-year cup and handle pattern to post 40 separate daily all-time high’s, bonds remain in a secular bear market, while the Fed has stated it will continue easing monetary policy during an untenable sovereign debt crisis with government fiscal restraint low on Trump’s priority list.

For the first time since September 2022, both CPI and PPI reports this week signaled inflation is officially back on the rise. Yet, the Fed has obviously caved on its 2% inflation target mandate to lower interest rates due to soaring interest payments on out-of-control government debt, while jawboning otherwise. Inflation has clearly leveled off above 2%, yet they continue cutting interest rates.

Also, despite the thankfully peaceful transfer of power since Trump’s decisive victory, the U.S. remains a deeply divided country. This division and the culture war that has come along with it are not about to go away any time soon, and that too has potentially bullish implications for the gold price.

Gold is set to explode once this necessary and healthy correction has run its course, simply because there is no way to avoid a material dollar devaluation next year to deal with out-of-control federal government deficits and debts, while the Fed is in a lose-lose situation. If the central bank raises rates, we head into a recession. If they continue to cut rates, inflation will rise even further.

During President Trump’s previous 4-year term, there was massive growth in U.S. debt, primarily because of tax cuts and the pandemic. The U.S federal debt is up $6.9 trillion since December 2020 and is expected to soar another $14 trillion from 2024 to 2028, an unsustainable path.

If Elon Musk cannot convince politicians to cut spending, while new tax cuts are approved, the deficit/debt problem would become impossible to ignore and the current “structural” deficit of $2 trillion-plus per year could easily mushroom. Earlier this week, a statement released by Trump said Musk will lead the new advisory Department of Government Efficiency (DOGE).

Unlike his first presidential victory in 2016, Donald Trump is coming into a slowing and more indebted economy, while the Federal Reserve is well into a rate-cutting cycle, with a 50-basis-point cut in September and another 25-basis-point cut earlier this month.

History shows that gold typically outperforms during Federal Reserve rate-cutting cycles. In 2016, the Fed was raising rates. U.S. debt in 2016 was $20 trillion, 104% of GDP vs. $36 trillion today, 122.8% of GDP, and is estimated to climb to 156.7% by 2028. According to forecasts based on the Trump win.

The U.S. deficit heading into 2016 was less than half that of what it is today, 3% of GDP vs. 7% now, potentially constraining incremental spending and/or additional tax cuts. Federal interest payments alone are running at $1.1 trillion annualized and rising exponentially, while already consuming 35% of government revenue.

Despite tariffs, the U.S. trade deficit rose from $46.6 billion in January 2016 to $62.0 billion in December 2020, and by March 22 it soared to $102 billion. The trade deficit improved after that but has now started going up once again.

Furthermore, government spending is currently supporting the economy, with a deficit of 7% of GDP, a rare level outside of recessions. The government, healthcare, and education sectors have contributed 70% of U.S. job growth over the past year. Job growth in the rest of the economy is running at an anemic 0.6% rate, a rate that preceded the 2001 recession by one month and the 2007 recession by three months.

Moreover, the October jobs report was the weakest since 2020 but is being written off due to the hurricane, while downward jobs revisions have become the new normal. With inflation remaining well above the Fed’s 2% target, a new era of 1970s style stagflation would become the Fed’s worst nightmare. But again, gold would benefit.

Following Trump’s 2016 win, the gold price corrected 12% in the first 45 days after the election, before going on to gain 68% over the remainder of his term (41% before COVID started).

A 12% correction from the late October peak at $2800 could take Gold Futures down to test its sharply rising 200-day moving average, currently at $2410 and heading to $2500 by year-end. A technically reasonable correction in any bull market.

The election result has only served to reinforce my belief that dramatically higher inflation rates are coming next year, which is something foreign investors, overseas central banks, hedge funds, financial institutions, large investors and finally, Western retail investors will want to hedge.

With gold, and especially silver, already facing serious shortfalls in supply vs. surging demand in 2024, new excuses to buy bullion long revered as the “ultimate store of value” and “premier currency without counterparty risk,” will likely push prices well over $3000 an ounce next year. Especially if stagflation rears its ugly head next year.

Posted by:

Jack Dempsey, President

401 Gold Consultants LLC

jdemp2003@gmail.com