Every day, financial headlines proclaim that Tesla is down for this reason, Apple is up for that reason, or copper is down for another reason…

Problem is, these explanations often contradict each other.

That’s not surprising, given that markets are not single, consistent entities.

Markets are interactions between millions of people. Each has his or her own fears, goals, methods, and perspectives. Multiple and even conflicting factors can all be true at once in a market. Resulting price movements are a cumulative function of the numbers of people pushing them in different directions with their decisions.


So when you see a headline proclaiming The Truth about any given price, you have to take it with a grain of salt. It’s safest to assume that it’s bulshytt. (That’s not a typo, but a technical term coined by Neal Stephenson.)

I’m telling you this because I have a theory for current precious metals price action.

Not wanting to be a purveyor of bulshytt, I want to stress that this is just a theory. Anyone who tells you they know the real reason is likely trying to sell you a load of… you know what.

China Is Shocked!

The market-driving headline du jour is that China is shocked at Trump’s latest tariffs. I’d have to call bulshytt on that. Of course they don’t like them, but they can’t be surprised.

What matters is not the political posturing, but the actual retaliation. It makes sense for that—and Trump shaking things up with the US’s European allies—to dampen the outlook for the global economy.

Mind you, I am not bashing Trump. I get that there were lopsided agreements and tariffs already in place. Whether his approach is the best way to resolve that is a huge debate I’m not going to get into in this brief post.

I’m simply saying that it’s not a surprise to see markets react fearfully when longstanding rules of the game are thrown out the window. What has surprised me is how willing many investors have been to ignore the rising tide of unpredictability. Even today’s red lights flashing across the board seem like a small reaction to a big deal.

Gold vs. Commodities

What’s even more puzzling is why a safe-haven asset like gold isn’t doing better in this context. Some headlines I see imply that gold is like pork bellies or coal; it’s down because commodities are down. But while it makes sense for commodities to be down if large numbers of market participants fear a trade war will slam the brakes on the global economy, it makes no sense for gold to sell off on this basis.

I’ve written many times that the price of gold is not a simple function of supply and demand. How many ounces of gold are mined vs. used in jewelry or electronics in a given year has almost no detectable impact on its price. My way of summarizing the various real drivers is that gold is a fear barometer. So, the same fear that’s bearish for commodities in general should be bullish for gold and silver. And yet precious metals are down with everything else.

What Gives?

Here’s my take. No bulshytt—only a theory.

The trade dispute is hitting some of the world’s biggest gold buyers—the Chinese—particularly hard.

When Chinese get fearful, they often cut spending with astounding speed. They tend to sock away gold when times are good. It’s there to be drawn upon if necessary when times are bad.

The current situation may be dampening Chinese demand, swamping out “flight to safety” demand from elsewhere.

People all around the world are active in the gold market, of course, but prices are determined at the margins. Reduced appetite from one of the largest pools of buyers would certainly put gold under pressure.

What to Do?

If I’m right about this, gold may remain weak while trade-war tensions mount. That could change quickly if the US and its trading partners reach new agreements. Or it could change more slowly as the global economy digests the changes.

I’m sorry, but I don’t have a single, simple action, guaranteed to be the best move today.

What I can say is that gold is oversold as is. For buying the metal itself, this is a buyer’s market. For the equities, it’s safer to watch for a new bottom to solidify.

I can also say that unless the trade war or other factors hit the global economy much harder than we see now, the recent decline in industrial minerals is even more overdone. Copper, cobalt, nickel—all the minerals actually in short supply—should rebound sharply, as soon as investors realize that the world is not about to end.

Finally, I’m looking to diversify out of natural resources into other market sectors. I’m particularly keen on “better mousetrap” companies that should do well whether the global economy slumps or surges. I won’t be rushed, but I am researching investments in this space.

That’s my outlook for the near- to mid term.

Wednesday, July 11, 2:07pm, EST, 2018