· The increased likelihood of a global recession
When everyone expects an asset to move in one direction (in this case, higher for gold), there’s often no one left to buy at higher prices. (…)
The “Buy the Rumor, Sell the News” Effect
Financial markets often follow the “buy the rumor, sell the news” principle. In this case, gold has been rising on speculation about how tariffs and Fed policy might play out. Now that these situations are materializing, traders who bought on anticipation may begin selling on confirmation.
This effect is particularly pronounced when an asset has experienced a parabolic move like we’ve seen in gold. The overnight futures high of $3,509.06 could represent the crescendo of this buying frenzy.
Contrarian Considerations
From a contrarian perspective, when everyone appears to be bullish on an asset, it’s often wise to consider the opposite possibility. The fact that most analysts are raising price targets, and few are suggesting caution is itself a warning sign.
Moreover, gold’s outperformance relative to silver and mining stocks suggests smart money may already be reducing exposure to the precious metals complex.
Near-Term Outlook
Given these factors, a near-term correction in gold prices appears increasingly likely. Markets rarely move in straight lines, and even the strongest bull markets experience significant pullbacks. After such a dramatic rise, a 5-10% correction would be entirely normal and potentially healthy for the longer-term trend.
However, if we’re about to get a 2008-like slide in stocks, then gold, silver, and mining stocks could be affected to a much greater extent. In particular, silver and miners would be likely to get a major hit.
The tensions between Trump and Powell are unlikely to dissipate soon, but markets may have already factored in the worst-case scenarios. As concrete policies emerge and uncertainty decreases, gold might paradoxically lose some of its appeal as a safe haven.
Given gold’s huge slide from above $3,500, it seems that this is exactly what happened.
Trump is now backing out of the extreme positions and the markets are taking a big breath of relief.
However, what we got today is just an indication of Trump’s willingness not to remove Powell and “be nice to China”.
How it might have worked behind the scenes?
Well, remember about the little-talked-about clue coming from China? The ban on rare earths exports? On April 14, I wrote the following:
“So, Trump backed off a little, while China discretely flexed its muscles by halting exports of its rare earth minerals. The latter didn’t get enough media attention, but in my view, this likely ends the dramatic series of tariff hikes – at least for some time.
You see, those rare earth minerals are essential to produce many of high-tech goods. It’s all nice as long as the U.S. companies still have some in their inventories, but they will eventually run out of them and the regular business operations can be disrupted. Trump (or his team) knows that. And while Xi can easily get away with crashing stock market, Trump may not have this privilege.
That’s why in my view this might be the end of this tariff race. What’s likely to happen now? Both sides are likely to keep their stance in my view, and at some point (perhaps weeks or months away), some kind of deal will be made, but the tariffs will still be greater than they were a few months before.”
Now, fast forward to the current situation.
The markets tanked, and one could read that Tesla’s ability to produce humanoid robots will be severely disrupted by the lack of rare earth minerals coming in from China…
Perhaps Xi was simply following the rules of Sun Tzu’s Art of War – in particular, the rule, where it’s useful to attach your enemy’s plans and allies instead of a direct confrontation. In this case, Musk’s company was attacked.
Anyway, Trump just showed that when the stock market’s tank, he’s willing to completely change his rhetoric. Makes one wonder if he’s sometimes saying things on purpose, knowing that it will move market in a certain direction.
So, what’s likely to happen next?
As I wrote previously, we’re likely to have a move toward normalcy and markets might react positively to it while gold’s gleam becomes less appealing. That’s exactly what we see now.
However, while gold is moving down, the stock market and copper are up again. So are the bottoms in them in? Are the blue skies ahead?
No. This is just an emotional relief. The tariffs were not abandoned. They were delayed for most countries, and Trump now just said something vague about being nice and about lowering the tariffs. However, as a principle, the tariffs are still likely to stay much higher than they were in the pre-Trump era. And markets being forward-looking are likely to discount that and continue to decline as that’s ultimately limiting the world trade, economic growth, demand for commodities and companies’ profits.
Today, however, the markets appear to be in the “emotional celebration” mood. Of course, this will pass, and reality will kick in. In our case, this means declines in stocks and commodities alike.
And speaking of commodities, please note that it’s that time of the year when copper forms MAJOR tops.