Guest Post: Gold Panic Part 2

Submitted by Yves Lamoureux of Blackmont Capital (Sequel to Gold Panic Part 1)

Perhaps gold investors are suffering the blues of too much good news since breaking out to the upside, north of the magic 1,000$ an ounce. Inflation being the big macroeconomic risk that everyone is looking for, might just be the real disappointment.

For most of the last three decades we have been conditioned to drive/manage by looking in the rear view mirror. The last big black swan event of the 70’s related to the interest rate spike  never replayed itself out a second time around. In the years ahead the unexpected might just be the norm and an extraordinary event could actually lead us to a hyper-deflationary black swan.

We have built one of the biggest credit bubbles in history. It would normally follow that it needs to unwind in epic proportions. The critical question for investors will be whether a normal inflationary trend can reassert itself in view of debt level, demographic, monetary aggregates and global economic shifts.

Inflation is a fundamental risk that endangers investors. However globalization and economic diversification has tended to reduce big swings in inflation shocks. The bigger need will be to calculate the next shock and I suggest that it will be hugely deflationary.

What about gold in this environment?

I have been mainly on the long side of gold for different reasons. I do believe that gold is the laggard in this cycle as everything else pretty much managed to go at bubble levels. Confidence in the financial system is eroding fast. Investors turning to gold can in fact trust this asset and do without the confusion.

We have seen behavior changes in investors. Perhaps getting kicked in the pants since 2000 does give way to pause and reflection giving preference to bonds and gold. Investment demand is the real driver just like it was with oil.

I have put up sentiment numbers in percentages on two graphs. It relates to the 2006-2007 gold price sideways action until the break out and on the other graph the recent tug of war of gold around the 1,000$ level.

One can notice that in both cases we have a good drawn out level that offers resistance. In the 2007 period, once crossed to the upside, sentiment numbers did in fact  match the new high. This is not the case now as 72% bull rarely compares to a top in previous patterns. Normal behavior would have people show excitement on the break with higher readings in sentiment. It's almost as if it is too good to be true and bulls can’t find the conviction to believe it.

I also have been watching commercial positions for years. Something really strange happened  from 2007 onward. In the future market 9 out of 10 times would that group be right and trounce the speculators. In 2007 more often than not, speculators started to score big against the not so smart money anymore commercial group. I did notice it in stocks, oil and gold. Why would pros lose their touch ?

We are at again one of those times where the short position from commercials is important and should act to force gold down. We did see the same behavior at the 700$ level from commercials but gold did break out and it eventually forced the big boys to cover back the short contracts. It will be quite interesting to see here who panics first…

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