Buy the Gold Bugs' Fear

Ignore inflation, gloom and the Dollar...

THIS ARTICLE does not speak to gold's proper fundamentals, writes Gary Tanashian in his Notes from the Rabbit Hole.

They are not yet very healthy, although some positive signs are finally gathering.

For the proper counter-cyclical atmosphere to engage gold bulls would need have risk 'on' markets and assets crack. Yet, gold (and silver) prices may well bottom before readily obvious fundamental improvement is apparent to a majority (as was the case in Q1 2016).

Far too much analysis is put out there linking gold with inflation. It is true that gold often acts as an effective inflation hedge, but it all too often fails in that capacity.

Far too much analysis is also put out there linking gold with war, terror, pestilence and other conditions of human suffering. The surest way to spot a gold promoter, if he is not pumping inflation, is his pitch for gold as a disaster hedge. Yes okay, and I have a little Unabomber shack in Montana to sell you too.

Far too much analysis is put out there linking gold with the vast "resources" and "hard assets" trades. These things are of a cyclical nature and gold is ready and waiting as the anchor of stability on the counter cycle, as cyclical assets are liquidated. At best gold under performs when resources and commodities are booming during inflationary growth phases in the global economy, and should be held only for long-term considerations at those times.

On shorter-term phases, you buy the fear in gold when many gold bulls, influenced by factors like those noted above, are puking their metal to the lowest bidder. It is an almost ritualistic "running of the gold bugs" as I call it.

The most recent liquidation was probably instigated by large speculative interests that chased the momentum of the last inflation trade, which gold did lead in December of 2015 as it bottomed 1-2 months before the tide began to lift silver, the miners, commodities and US and global stock markets.

That inflation trade has been largely anti-US Dollar, and it has weakened in the face of the recently firm USD. Simple.

But what is not so simple is the concept that as counter-cyclical forces begin to liquidate the various asset trades, the US Dollar (the reserve currency counter-party to the...asset party) rises against the wishes of global casino patrons, not to mention a US President who wants his cake and would like to eat it too.

The opportunity in gold and especially gold stocks comes when the gold bugs who've been chasing the conditions noted in the first 3 paragraphs above finally give up in despair, thinking that Uncle Buck is the enemy.

The Large Speculators are also puking out as the Commercial Hedgers take the other side of the trade. Everybody knows there's no inflation, after all <sarcasm alert>. Gold's Commitment of Traders structure is similar to 1 year ago, when a good rally was sprung (there's that seasonal action too). Leading to this juncture we (NFTRH) spent months noting an incomplete trend to a positive alignment. Boink!

Gold is almost never a 'buy' when it is both loved by the gold "community" (as a well known leader of the bugs calls it) and the cyclical backdrop is positive. It is almost always a 'buy' when it is hated by the gold "community" and the cyclical backdrop is counter, bleak and/or not inflationary.

This article illustrates that Thing 1 (gold is hated) in play and Thing 2 is yet to be established. We've been preparing for a pretty good bounce at least and if the macro turns, a major move at best.