The gold market has been squashing the gold-bugs for such a long time that it is perfectly understandable that they would seize the slightest rally and declare it the return of the messianic bull. We read the situation quite differently; it is bull, but not of the messianic kind.
It is becoming increasingly evident to us, that gold’s place in economic matters has changed drastically and permanently. The gold-bugs still think that gold has a roll to play in the currency world, but the reality is that technology has made it irrelevant. Bitcoin is more of a currency than gold will ever be.
Currencies were invented as proxies for trade because they were more versatile than the alternative—bartering. Gold as a proxy for trade is: a) too cumbersome, and b) too scarce to handle the magnitude of trade in today’s Global economy. The bugs use the latter as a reason for pricing gold at $30k/oz, but that is just not rational.
All currencies, are essentially digital, backed by the trustworthiness of the country that issues them, and valued by auction. We are as likely to go back to using gold as a currency, as we are to using horses as the main form of transport, or oil paintings to record our holiday travels. Like always, technology eventually changes everything. We still value horses and fine art, even though technology has made them both obsolete, but for different reasons than we originally did. Gold will go on being valued, just not as a currency.
Let’s turn to the reasoning behind our call for a further drop in gold.
The FED, as expected, held rates unchanged and lowered the pace of future rate hikes. Both the Dollar and gold reacted as if the FED had surprised the markets with a rate cut; Dollar down, gold up. This doesn’t change the bias toward rate hikes, it just slows them down. We continue to maintain that gold needs rates to fall in order for it to sustain any rally, and there is no indication that the FED is going to cut rates in the next six months.
We regard gold as being mispriced.
The chart below is an updated version of last week’s chart showing how, even after gold and the 30-year bond both appreciated, the price pattern is now synchronous (blue lines in the blue rectangle). This week, we also want to point out the divergence in the RSI (red line) which further increases the probability of a breakdown in gold.
Below, we present the comparison of the gold price (top chart), with the commitment levels of traders (lower chart). Notice how the extreme level of short positions held by the commercial traders (dark red bars) continues to be maintained. Commercial traders tend to be right, while speculators tend to be wrong. Odds are that gold will go down mid-term.
Gold is trading on hope and wishful thinking, instead of according to the probabilities.
We continue to trade according to the probability that gold will come down in price and that gold miners will fall in response.
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