Saturday, June 16, 2018

Gold and VIX Fall in Response to Trump Tariffs

Gold broke down on Friday, falling to 1279 from about 1300.  Some technicians were calling 1280 critical support. What puzzles me is that it fell on the same day that Trump announced $50 billion in new tariffs and China announced $50 billion in response.  Tariffs are disastrous; trade wars are worse.   I would have thought this news would spike gold, but it had a reverse effect. 

I looked at the VIX, the one-month forward volatility indicator, and it fell by 1.16% in response to the announcement of a trade war.  What? The announcement of a trade war led to less volatility? Sometimes the announcement of news causes a reverse result when insiders have been trading in anticipation of the announcement. Then, they sell on the news.  That may have happened here, but it still seems strange. Another possibility is that Mario Draghi, head of the European Central Bank, made dovish remarks about ECB interest rate policy, causing the euro to fall against the dollar. This has short-term bearish implications for gold, which often goes in the opposite direction to the dollar. Low European interest rates may fuel demand for US stocks.

Whatever the reason, the decline in gold and the VIX both suggest a market sentiment that risk in the dollar and in financial markets are falling despite a trade war with one of the largest holder of dollars.  As I've previously blogged, the massive monetary expansion of the Bush and Obama years may have created a lengthy bear market in commodities. Lower interest rates means more funds are available for exploration, which means lower commodity prices. Eventually, the pendulum swings the other way as falling prices cause miners to go bankrupt.  Then, there is an explosion to the upside, as gold experienced in the 1970s and 2000s.

Still, a bloated stock market, a high dollar, significant Chinese dollar holdings, and the announcement of a trade war don't support a strong dollar, rising stock market scenario.  I'm puzzling over the apparent decline in volatility in response to the trade war news. Is the trade war a ploy or fake news of some sort?  It was announced on the heels of positive news about North Korea, which should have helped improve Sino-US relations.

If the VIX falls much more, it might be sensible to buy it in case of a sharp market fall at some point. I've made the decision to buy gold when it falls, even if that means to $200.

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