This Is Why Gold Is Surging Higher
London (June 12) It was just two weeks ago that the SPDR Gold Trust ETF (GLD) was close to breaking down and heading to lower lows for the year. But since late May, it has staged a significant rally (up each of the last 8 trading sessions) and suddenly GLD is sitting near highs from earlier in the year.
(Source: StockCharts.com)
In this article, I will discuss what's driving this momentum in GLD, how there is a perfect bull market setup in place that could result in substantial gains and how I'm positioned to take advantage if there is a breakout in the sector.
The Bull Market In Stocks Is Being Tested
The current U.S. economic expansion that began in June 2009 just hit the 10-year mark and is the second longest in history. By next month, it will become the longest — surpassing the 1991-2001 expansion.
Given the cyclical nature of economic expansions, we have to ask how much more "boom" is left before the bust cycle takes hold?
The current one is already long in the tooth, but there are plenty that believe this growth cycle isn't finished just yet and it will last for another several years. There are many signals, though, that are indicating the expansion could abruptly turn into a contraction in the very near future.
Slowing Rate Of Growth
U.S. GDP in Q1 showed a healthy 3.1% rate of growth in the economy. However, Q2 GDP estimates are quickly being revised lower as there are clear signs of a slowdown.
The U.S. Manufacturing PMI declined to 50.5 in May, which is the lowest level since September 2009. Meanwhile, new orders contracted for the first time in almost a decade as customers delayed purchase orders due to uncertainty with the economic outlook. This weakness in manufacturing will act as a drag on GDP. The fact that it's also showing the weakest growth since the Great Financial Crisis doesn't exactly bode well for the argument that the 10-year long expansion will continue.
There are many factors that are negatively impacting growth in the U.S. economy.
1. The Fed Funds rate has gone from 0% to 2.25–2.50% over the last few years. While short-term interest rates are still extremely low by historical standards, this has been a lackluster expansion and one that has a massive amount of debt in tow. The latter should be the major concern, as ultra-low borrowing rates are the only thing that has kept the U.S. deficit from surging past $1 trillion per annum.
2. The trade disputes and resulting tariffs that are being levied (and threatened) by the current administration aren't intended to hamper economic growth in the U.S. (just the opposite), but it's a fine line as well. Too aggressive and that can have negative consequences, including disruption and uncertainty in the supply chain. Trade wars can also lead to inflation, which is another serious concern.
3. It's possible that some of this is simply an exhaustion of this expansion cycle — i.e. a completely normal ending as this bull has run its course.
Inverted Yield Curve
The greatest signal of a looming recession is being given by the bond market, as the yield curve is now inverted. History has shown that when the yield on the 10-year is less than yield on the 3-month treasury bill, then a recession will occur in the not-too-distant future.
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