Gold & the rising US dollar
The gold community is totally flabbergasted about the price reaction of the yellow metal, following the Trump victory.
Everybody was expecting a breakout, but we got a breakdown: the gold price tumbled with $150 in the following days, and is currently flirting with the $1.200/oz mark.
All the pundits are now falling over each other, to deliver their insights on why gold is dropping. You know, these are the same so-called experts which were telling you why gold was ramping up, a few weeks ago. Utter nonsense!
Lets see what these guys are throwing in the air, as an explanation.
1) Gold is dropping because rates are rising.
Dedicated readers of Secular Investor already know, for a year now, that a new (upward) rate cycle is not bearish, but historically bullish for gold. New readers can check out our mailing from last year, here: http://email.secularinvestor.com/t/r-0AF80BFF1AF76D532540EF23F30FEDED
2) Gold is dropping because stocks are rising.
The stock market indeed taking some thunder from the gold space, but this is just a partly explanation. In the global capitalization of the financial markets, stocks are good for ‘only’ 1/5 of total liquidity.
So if stocks are attracting new funds, why should they come from the gold segment. We think these are currently coming from outflows of the big bond market. This shouldn’t be a negative for gold, necessarily.
3) Gold is dropping because the US dollar is rising.
This is another one of those false reasons to talk down gold. OK, in the short term, gold and the US dollar mostly move in opposite directions. But then again, there are many moments in history when gold and the US dollar moved in the same direction.
- End of 2003 to middle of 2004;
- Beginning of 2005 to beginning of 2006;
- Fall of 2008 to beginning of 2009;
- Beginning of 2010 to middle of 2010;
As you can see, the US dollar-index, which tracks the most important currencies against the USD, is currently at the same level as where it was in 2003. Over the same period, gold (in US dollar terms) rose with +227%.
How is that for a comparison?!
So all these reasonings combined, shows us that gold is on its own path. Of course, there influences on various fronts, but in the end, none of them is decisive.
This brings us to our own conclusion: Gold is dropping, because investors are disappointed. So it’s an emotional reason, why gold is being sold. Nothing more, nothing less.
Of course, most of our readers know that when we point towards emotional selling, this move will probably reverse in short notice. More importantly, these short emotional corrections are followed by face-ripping upward accelerations.
Like the one we saw at the beginning of the year.
We most certainly know this is emotional selling, as smart is backing up the truck. Why are we so sure of our case? Well, we’ll provide you with some more insight.
If we were indeed in a bear market for gold, we would see carnage in the gold equity sector, especially in the junior segment, which would be heavily sold again the majors.
But what we are seeing in the current sell-off, is enormous strength among the juniors.
On the chart above, you see the TSX Venture index, which consists mostly of juniors, against the HUI Gold Bugs index, which is made of majors.
The juniors are showing major strength, while the gold market was generally showing weakness since the summer months.
This is not the kind of action one would expect in a bear market. This is the kind of action you see in a bull market, where smart investors are upscaling their risk levels, with juniors.
And that’s exactly what we experiencing at the moment.
So the smart money is profiting for an emotional mass. And you should be doing the same thing, as we expect the current drawdown to reach its limits in the coming days.
Prepare for fireworks in the coming weeks and months, within the gold equity sector. As prices will be catching up fiercely.
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