Political Capital Is Being Misspent in D.C.

The more I listen to the intelligence hearings and the divisiveness over the health care bill, the more I think the tax and regulatory reform that The Donald promised us will be a 2018 agenda item. The Trump rhetoric both domestically and abroad combined with the saber rattling from North Korea should start to take a toll on the exuberant confidence demonstrated by investors thus far in 2017. I have confidence that House Speaker Paul Ryan and U.S. Rep. Kevin Brady have a solid plan for health care and tax reform, but the executive branch seems more focused on wiretaps and golf at Mar-a-Lago. This delay and waste of political capital should bode well for gold and other portfolio protection assets. Given that gold spec length through last Tuesday (prior to FOMC pop) was down 3.5 million ounces last week and silver lower by 37 million ounces, the market is far from being overbought. Gold in euro terms has not performed well the past week, so I would expect that to pick up some strength again. I still believe that bitcoin as an alternative to gold is getting some interest, but the defeat of the Winklevi bitcoin ETF will keep the gold ETFs in the retail investors' wheelhouse. Palladium ETF saw its largest one-day inflow in almost a year. Gold and silver implied vols have hit a 30-month low and are looking rather cheap, but the same could be said about any asset class presently. Base metals are following copper's lead with supply worries continuing. Escondida mine workers rejected an improved contract offer from BHP Billiton and have continued to strike. Freeport McMoRan is having continued difficulty resolving issues with the Indonesian government and the Grasberg mine's output is starting to be affected. Copper net length was reduced by 9,000 lots on come (London Metal Exchange report tomorrow) and the $5,650-$6,000 range continues to hold. On the demand side, last week's positive numbers out of China seem to be confirmed by the Australian dollar's strength and this should keep copper on solid footing. Zinc is still the outperformer over the past 12 months and there are reports that low treatment fees may affect 644,000 tons of zinc smelting capacity onshore. While Elliott Management continues to sling arrows at Arconic's board, the Trump budget should help the company increase margins in the lucrative defense and aerospace sector. The oil market is unable to sustain a rally despite the Saudis' desperate attempt to talk up OPEC continued compliance. The U.S. is the swing producer and technology has continued to drive down Permian costs. Oil rigs rose by another 14 last week, which continues to weigh on bullish sentiment. Commitment of Traders last week showed net length declining 87,000 with shorts rising 49,000 contracts and longs declining 38,000. I believe the oil price still has to test the $45 level as there are still a few large longs in the market who need to exit and the continued inventory rises are offsetting the more public rhetoric of the Saudis and the forward backwardation (tightness). There are at least two large longs from the fund side who seem willing to bet that the U.S. production will wane in the next few dollars, but I am not sure that will be a winning bet, especially if the dollar strengthens again.

Political Capital Is Being Misspent in D.C.

Washington kerfuffles should bode well for gold and other 'portfolio protection' assets.

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