Gold Needs to Consolidate Before Challenging the All-time High

venality businessman or banker  in black costume throw open one's shirt packed heap gold money
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The market is a cold and callous beast. It has only two emotions — fear and greed. It has no room for anything else. No sympathy, sadness, remorse, regret, love or happiness. The presence of money strips the complexity of humanity back to two base feelings.

I bring this up because, overnight, a crazed lunatic stabbed and shot a British MP on the street. The murdered woman, Jo Cox, held a pro-European and pro-immigration view. The belief is that the murder was politically motivated.

The Brits have had the good grace to cancel any campaigning over the Brexit referendum in the wake of this crime. Despite this, the market’s reaction has been as swift as it has been cold.

According to the market’s interpretation of events, the risk of Britain leaving the EU is now diminished. The brutal killing has clearly tainted the ‘leave’ cause. That’s the kneejerk reaction, anyway. But it remains to be seen whether Jo Cox’s death was politically motivated or not. Given the huge stakes involved (politically), there’s a good chance we’ll never know.

The market’s reaction to the news was brutal. Gold was in the process of breaking out to new highs, hitting US$1,315 an ounce, before reversing sharply and finishing the session around $1,285.

Surprisingly, the US dollar index fell along with gold. This is unusual, as gold and the US dollar normally trade in the opposite direction.

The Dow Jones index started the day down 120 points before swiftly turning around and finishing the session 93 points, or around 0.5%, higher.

First fear…then greed.

The biggest mover on the day was oil. Brent crude tanked 3.6%, and is now trading around US$47.20/bbl. It completely decoupled from the broader stock market. It’s down nearly 10% in a week.

You have gold and the US dollar trading in tandem, and oil and the stock market diverging. What is going on? It’s the result of ample central bank liquidity, combined with the will of the people trying to assert their independence against this intrusion into free markets.

Not that we have anything resembling a free market. But central banks constantly pumping liquidity into the market is just a manifestation of the relentless erosion of freedoms people are subjected to. Financial repression must have an outlet somewhere.

That’s what Brexit is really about. It’s the desire to escape from the bureaucracy that is engulfing Europe. Britain is culturally different from Europe and the Brits are trying to assert this independence via the Brexit referendum.

Napoleon, head of the military state of France at the time, once referred to Britain as a ‘nation of shopkeepers’. What he meant was that England was a great trading nation, which had amassed wealth through control of the seas, which enabled trade to flourish.

Now, with a horrendous current account deficit of around 7% of GDP, Britain obviously isn’t keeping shop too well anymore. Like Australia, they’re selling off land, and the promise of stable government (relatively, anyway) and the rule of law to fund their standards of living.

Like Australia, Britain is borrowing huge amounts of money, much of it coming from Europe to keep the consumption party going. They’re able to do this because of the credit and credibility the nation has built over hundreds of years.

But Napoleon’s sentiment still holds true. While the shops may be boarded up, the cultural aspect of once being a ‘nation of shopkeepers’ hasn’t changed.

In the past, nations who built their wealth on trade generally did so from having a strong rule of law and institutions, while maintaining a liberal economic philosophy. That is, the freedom of movement of people, goods and capital, and an absence of an onerous bureaucracy to stifle trade.

That is what made Britain great. As an aside, it also gave Charles Dickens plenty to write about, but that’s another story. My guess is that it is this cultural memory that makes Britain wary about continuing down the road with the European Union.

Anyway, I got off the point. What I’m trying to say is that this constant meddling in the economy, this constant manipulation of the price of money and credit, has far reaching and long term consequences.

The issue of Brexit and the ongoing stresses across the European economy is just one such consequence. The rise of Donald Trump is another.

Check out the chart below. It shows the European Central Bank’s (ECB) balance sheet is back to the highs from 2012, when it was all about Grexit. Has ECB boss Mario Draghi been pumping liquidity to ward off Brexit? It certainly looks that way.


Source: The Daily Shot
[Click to enlarge]

Speaking of meddling, the Bank of Japan decided not to meddle at its monetary policy meeting yesterday, throwing markets into a tizzy as a result.

Clearly, the junkie wanted another hit. The initial response was to send the Nikkei sharply lower, and the yen and gold sharply higher. That’s why the Aussie market finished slightly in the red yesterday, after starting off on the front foot.

But all that reversed following events overnight. It will be interesting from here to see what kind of follow-through we get in the days ahead.

Before signing off for the week, I’ll leave you with this…

Gold priced in Aussie dollars reached a high of $1,806 an ounce overnight, before selling off sharply as markets reversed course. This was the exact high reached in early February.

That tells me gold has to back off and consolidate for a while before making a sustainable move higher and challenging the all-time high of $1,836 an ounce, reached in September 2011.

It might take a few weeks, or a few months, but I think it is only a matter of time.

Cheers,

Greg Canavan,
For The Daily Reckoning

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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