Gold Has Plenty of Uncertainty Behind It

Gold threatened $1,300 an ounce and then retreated on a risk-on day Monday. I am not sure why except that people were so worried last Thursday about what North Korea might do over the long weekend that they bid up gold and the CBOE Volatility Index beforehand and then yesterday provided a relief rally in equities. The one thing North Korea has done is give Mr. Trump an excuse for everything. Tax reform and health care will be delayed, but just look at how my friend President XI and I are dealing with North Korea. On the back of Theresa May's call for a snap U.K. parliamentary election, effectively a vote of confidence, in June; and the looming French presidential vote; AND the distressing outcome to give Mr. Erdogan sweeping powers in Turkey, there are reasons internationally to worry...and that is just with our allies! This is creating a feeling of uncertainty that should keep safe haven assets like gold and silver in many portfolios. The positioning is not a worry as the 1.7mm ounces of net length that was added to CFTC figures through last Tuesday still keeps gold length far below 2016 highs. The liquidation in the SPDR Gold Trust and other gold ETFs post Nov. 8 has recouped very little and global gold ETFs are more than 20mm ounces off their all time highs. I think gold is set up to make a quick run through the $1,300 strike as volumes in the front month have pushed through 15% (up from 11% 10 days ago). Despite some positive economic numbers from China, base metals are getting hit pretty hard with copper and iron ore leading the way lower. The combination of Trump's infrastructure/tax reform or ability to get anything done, with the uncertainty over the U.K. announcement has the reflation trade being questioned. BHP Billiton , Rio Tinto , Vale and Glencore are all getting hammered with many analysts pointing to a steel glut finally taking its toll on iron ore. The iron ore backwardation to 2018 is flattening but only because the liquidation of future positions in the front month is so vicious. This is all despite China showing better-than-expected industrial production (7.6% vs. 6.3%), fixed asset investment (9.2% vs. 8.8%), and GDP 6.9% vs 6.5%. But the biggest figure overnight seems to be new loans dropping on back of a tightening onshore monetary policy. The fact is, like the U.S. with increased oil production, China is becoming more self sufficient with industrial metals. Alcoa is faring better than other commodity equities as aluminum is little changed on the London Metal Exchange with the announcement by China's National Development and Reform Commission (NDRC) of a curtailment of 2mm tons of capacity. As with steel, aluminum is in over capacity and these announcements are more window dressing and not actually taking production offline. The glut remains! Oil has given back some of its recent gains but is now forming a base above $50. The weaker dollar should help crude in the near term as should news that Iran has said it would back extending production cuts. However, I believe that positioning and analysts are getting a bit too bullish in crude with managed money net length increasing 118 million barrels last week, the biggest weekly gain since the OPEC agreement was reached. Genscape is predicting a 480,000 barrel draw at Cushing this week. Anything less than that could cause a reversal of positions.

Gold Has Plenty of Uncertainty Behind It

Even without North Korea, there's plenty of uncertainty coming from U.S. allies.

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