1. Inflation is Rising and for how much time can the FED keep raising rates without causing an economic slowdown.
2. Stock market valuations are High
3. Geopolitical risks are presently being ignored, but there are plenty of potential Reasons.
4. Sooner or later Fiscal deficits will matter.
5. Managed money short position open interest is now at a record level where spikes have indicated a reversal several times during the last few years.
Gold (GLD) has been Falling over the last 4 months from $1,350/oz to $1,220/oz and the sentiment is far from Bullish. There are however a number of potential reasons that can reverse the trend. The record level short interest in XAUUSD has the potential for a short squeeze if the market factors in any of the potential triggers.
We are presently at record high levels for managed money short positions, which has increased during the decline the gold price over the past few months. Gold has seen similar but smaller spikes over the last few years and it has been common to see the price of gold to increase from those levels as managed money has been forced to Short Covering.
Rise in Inflation:
Past few years we have seen increasing growth rates for both consumer prices and producer prices. As both the short and long-term interest rates have increased, the market has so far not been overly concerned by this trend.
U.S. Government Debt to GDP is at a Point where Rising interest rates will not only affect consumer or corporate expenses, but also government expenses much more than what we have seen in history. Right Now, the fx market has Shown little concern over the growing government debt levels and deficit spending.
Trump certainly has his own style for dealing with foreign political affairs. The strategy seems to entail various threats or ultimatums. There is no denying this strategy has so far seemed very effective when dealing with North Korea, but it feels like a risky strategy.
If we take the number of potential disputes. With countries generally assumed to be allies to the U.S., sanctions on Iran and Russia, China over trade. It just takes one of the countries to fight back hard to cause an increased focus on geopolitics which would be beneficial to gold.
Stock Market Valuations:
Whether we are at Record high for U.S. stock market valuations or just very high valuations depends on the ratio one chooses to focus on. Other factors discussed will certainly have an effect on the stock market, so what we refer to here is the fact that the stock market declines from the weight of the expectations
Many would argue the U.S. Dollar will naturally be the safe Asset when the next crisis hits and the price of gold will decline as we saw during 2008. While that is certainly a possibility. If we consider the performance of the gold price from Past 5 years prior to today in comparison to how it performed up until 2008, We think the probability of gold performing well is a far more likely possible Scenario
While gold has been trading low over the past few months, the long-term reasons for holding gold are as valid as they have ever been good.
The stock market high valuations, trade tension, geopolitical risk, and increasing costs to service debts could serve as a major factor in the short to medium term.