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The Gold Market & Trump's Treasury

|Includes: SPDR Gold Trust ETF (GLD)
  • Gold Trend: Primary Pattern Still Higher - Barely
  • Velocity of Money & New Mindset at U.S. Treasury
  • How We Will Know If Trump Gets a Pass

For much of 2016 gold trended higher, shifting the primary pattern to bullish for the first time since 2012.

Despite sharply lower prices since the U.S. presidential election, that primary pattern when measured with a Dow Theory yardstick is still higher. As long as the current market correction continues to close above the 2/3 rd retracement level of the 1-year up-move at 1158 the bull market is intact.

Figure 1. Weekly Gold Chart 12-1-2016

Long-term 2/3 rd levels in major markets are always worth watching and even more so given the recent regime change in the U.S.

Gold is a fear index. If there is a threat to the global economy, gold goes up. When the global economy is on solid footing, gold goes down. On the surface gold has greeted regime change in the U.S. with a nose dive, which is a vote of confidence for the incoming U.S. President.

There are however two concerns I have, which will get sorted out sooner rather than latter by the financial markets.

Granted the sample size is small, but Republican Presidents don't have the best economic track-record over the last 20-years. I think it comes down to misunderstanding the velocity of money while overstating their ability to cut waste. While the Democrats may not understand the velocity of money entirely either, they have a built-in advantage in that social spending puts money in the hands of people who are much likelier to turn around and spent it. Give well-to-do people a tax break and that money likely ends up in investments funds. Give people on the lower half of the socioeconomic ladder more money on payday and that money goes right into retail sales. Monthly retail sales in the U.S. is up 25% in the last 8-years, to over $400 billion per month. This is why the velocity of money is much higher in the U.S. compared to Europe and Asia, which is why our economy is growing faster -- retail makes up 70% of our economy -- and our Fed is raising interest rates compared to our trading partner's central banks, which are still in easing mode.

Republicans are also big on cutting "government waste", which means they don't like subsidies of any kind. The problem with this is that for every dollar you stop the government from giving out, it stops $6 from coursing thru the economy. (The velocity of money based on M1 is approx. 6 in the U.S. -- lower for rural areas)

Cutting subsidies across the board will mean a decrease in retail spending for sure. Job growth from infrastructure spending however will help offset this, particularly in urban areas. But the drag from agricultural subsidies being cut will be harder to correct. Higher food prices down the road won't help smaller farmers in the first couple of years that subsidies are slashed. And the average American won't benefit from longer-term higher food prices either.

My second concern is the shift in the U.S. Treasury from a policy of coordination with our trading partners for the good of the global economy and thus for the good of America's long-term prospects, versus a policy of America first right now. Will a shorter-term policy outlook be good for America's place in the global economy long-term?

This will certainly take time to play out, and the best indicator that it is, or isn't, is going to be gold and its leading indicator sister silver.

If Trump is to get a honey moon it will be telegraphed beforehand by gold slicing lower thru that 1160 level shifting the primary pattern in gold back lower. If that level holds however, and intraday patterns start to line up higher, we could be in for another rally in gold similar to the up-thrusts seen in late winter and early summer, and that would not be a good sign for the incoming Republican regime.

It would also mean new life for the bull market in gold.

Jay Norris is an analyst at Trading-u.com

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.