The Twit’s Twitter

The Donald has spent the last couple of weeks trying to obfuscate and distract the world away from the investigation into Russia’s influence on his election (which has the odour of treason). To some extent, he has been successful because most of the media is easily distracted by the bright lights and smoke from bombs, but by far Trumps most impactful action has been his comment that he wants a lower dollar. That, moved the USD index and, more importantly, the USD/JPY FOREX pair lower than the “mother of all bombs” could, and, as a consequence, sent gold and silver higher.

Geopolitical risks like the European elections and the Syrian conflict certainly hang in the air, but the fact that the Twit’s Twitter about the dollar has had a more profound effect on volatility and currency markets than the political risks have, leads us to conclude that the move lower in the currency and the resulting move higher in gold and silver is unlikely to be sustainable. Our view is further supported by the signs of strength that the world economies are displaying; for example, the improved trade and economic data for both China, and Australia, as well as in the US:
China

Mar Trade Balance: $23.9 bln vs $12.5 bln e
Imports: +20.3% vs +15.5% e
Exports: +16.4% vs +3.4% e

Australia

Mar Employment Change: +60.9K vs +20.0k e
Mar Unemployment Rate: 5.9% vs 5.9% e
Mar Participation Rate: 64.8% vs 64.6% e

Domestically (U.S.):

the preliminary reading of the University of Michigan Consumer Sentiment Index for April rose to 98.0 from 96.9 in March (it was 89.0 same time last year).
the Current Economic Conditions Index rose from 113.2 to 115.2, which was up from 106.7 in the same period a year ago and the highest level since 2000.
the Consumer Price Index (CPI) decreased 0.3% in March while core CPI, which excludes food and energy, decreased 0.1%.

The lower inflation reading in March will support the prevailing idea that the FED will not be raising rates so aggressively, but it does not mean that deflation is back, The main reason for the lower inflation reading was lower energy prices and lower wireless telephone pricing. With oil prices already recovering, we suspect that next month’s CPI will show higher inflation once again.

The underlying economy is more solid than the markets are pricing-in at the moment. We continue to regard weakness in equities as a dip that should be bought in the near-future (when prices start to turn around).

Equities
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The GAAP earnings for this reporting quarter have jumped, which correlates with a continued bull (blue oval on the chart below). In fact, it looks like we are just at the start of a new bull market, with industrial production, rates, and GAAP earnings all starting to rise after the 2015 double-dip mini-bear.

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The VIX volatility index continues to carve out a local top and the SPX may correct down to meet the trendline at 2200 (chart below). That, however, is a worst-case-scenario. The SPX could turn around sooner if some of the geopolitical noise (such as the French election) quiets down.

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Gold

As we pointed out in the introduction, we see the recent rise in gold and silver as a knee-jerk reaction to Trumps public pronouncements that he wants a lower dollar, more than a serious flight to safety (although we do admit that there is some geopolitical positioning involved). This type of reaction is not likely to last. We think that interest rates are still biased to the upside despite their recent consolidation. Rates and the dollar are only correcting back into their respective upward sloping channels following the Nov.-Dec. 2016 upside breakout (chart below).

Gold, having broken through $1260 and $1280 resistance, is now likely to meet serious resistance at $1300; unless rates continue to head lower, gold will be stopped at the $1300 zone.

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The gold mining equities have reached resistance levels and downward sloping trend-lines (red ovals on the chart below) and are, therefore, vulnerable.