It's only covid 19

We have been whipsawed again and I start thinking maybe I should zoom out a little and try to see a big picture again. What has happened with the gold sector in the last six months and what does it mean? Is it just the manipulation or there is something else to see?

I believe that the most traders interested in the gold sector, including myself, have been operating on the simple postulate that in an environment where unprecedented money printing is going on, gold should be the main beneficiary. Just look at what happened in 2008 and there is the proof, no? No, at the moment, that is obviously not true, so my only explanation is that people are ditching gold as the inflation protection monetary metal in favour of other commodities, in particular those perceived as potential beneficiaries of green energy policies being proposed by the new administration. In the Biden economy, there will be huge investments in the green energy sector and infrastructure reconstruction, the consensus bet is that the monetary risk emanating from the rising debt and rising trading deficit will be dealt with by the ensuing economic boom. 

Not that I agree with the consensus but this line of thought allows me to reconcile some discrepancies that we have seen recently in the commodities market. For example, monetary and fiscal easing should have resulted in inflationary pressure in the commodities market and it did with one exception, gold. But why? Shouldn't gold be leading the pack? The difference between gold and the rest is that the gold is a monetary metal and the rest is industrial metals/commodities. My conclusion is that the market participants bet on the inflation but they also bet that the inflation will be under control, therefore, there is no need for the monetary hedge. 

This theory is easily observable when we check the action of gold and other sectors since the March low. At the low, there was uncertainty about what will happen to the economy, therefore, when printing money started it caused the gold to fly out of the block before and faster than anything else. The difference between the 2008 crash and now is that in 2008 everyone believed that that was a genuine economic issue and now everyone believed that the only reason for the downturn was the covid 19. As soon as the good news started coming out about the covid 19 vaccines the gold turned around. On August 11th when the news about the covid vaccine came out of Russia GLD dropped 5.37%, more than any day during the March crash, people thought the danger had passed!

For gold, this day marked the top, for all other markets it marked the beginning of the acceleration phase. Cryptos, copper, lumber, oil, platinum, palladium, uranium, Russel 2000, S and P 500 etc all gained tremendously and when Biden won the elections they all accelerated further in anticipation of more printing and huge government programs to jump-start the economy. So, as I noticed in one of my previous blogs the whole March debacle feels like random noise in the continuing bull market, no one believes that there are underlying issues with the rising debt and trade deficit. The MMT prevails, the problems are blamed on covid 19.

All other discrepancies in the markets can be explained with the same reasoning, the belief that despite the unprecedented printing the inflation will be under control. For example, gold and dollar declining together since August. Gold is unwinding the gains because no need for a monetary hedge in controlled inflation and dollar is declining steadily because of monetary inflation. 

Another thing, gold miners in Australia have been reporting stellar financial results one after the other one but they are relentlessly sold off regardless. The only explanation is that the hedge funds are leaving the sector for sectors that they perceive as the growth sectors for the next year or two therefore using any strength to unload gold shares. The result is that all commodities rise but without gold.

Also, silver generated the bull signal but gold failed. Explanation, silver is an industrial metal that will be in the centre of the green energy boom, gold is just monetary. Same with platinum (industrial metal, green energy), it exploded to a new high in the recent weeks, while gold is struggling.

 Same with palladium, it generated a quadruple buy on Friday, etc...

Cryptos have, in my opinion, a little bit different dynamics behind them. I see cryptos as mainly millennials generation play. This generation understands technology and can see the benefits of adopting bitcoin as a crucial part of the new world the way they see it. I think they will never understand the gold, and vice versa, the older generation will never understand the bitcoin, in spite of the fact that bitcoin and gold are practically playing the same role in the old/new world. The main difference between the millennials and the boomers is that the boomers have trust in the system therefore they will never go for gold unless they lose that trust. All their money is in the S and P and real estate and will stay there until it all comes down crashing and burning in front of their eyes. The millennials do not have this trust in the system and do want to change it now, therefore, all their energy is behind cryptos and the result is visible. The smart money sees millennials as the future and it is starting to accept the inevitable, that is why we see institutions starting to pile into the bitcoin.

In the light of the above discussion and the ongoing melt-up in the general markets, the question is, is it really sustainable and if the answer is no, how long before the crash? 

I think that the current rally is not sustainable and the market will go into harsh correction sooner rather than later. Before the correction, I will rather be in commodities that will benefit from the current psychology than in gold which, even if rising, will underperform. If I had to guess I would stick to my projection that once the S and P 500 is above $4000 we will be in dangerous territory. Probably, it could go to $4400-$4500. At that point, gold might be at $2200-$2300 but silver might be at $40-$50. For this reason, I decided to move my attention away from solely the gold sector and diversify in other sectors, in particular silver, uranium, lithium, palladium, oil. I will also mainly be short term trading trying not to hold positions over the weekends. At the S and P over $4000, I will start building a short position in SandP and a long position in dollar. I will keep these over weekends with no hesitation.  

The big issue for the S and P at the moment is that the 10 and 30-year bond yields are rising and threatening the whole narrative of the FED being able to manipulate the yield curve. I know that the FED is buying the treasuries at the pace of $80B a month ($1T a year!) but that is not enough because the current yield on the 30 years is 2% and rising. This level is the Fed's target for inflation, above this level and we might be in trouble, therefore they will have to step up now and push the yields down. When one looks at the SKI chart of the 10years yield it has generated a true bull signal back in Oct 2020 and is up 49% as of the last Friday.

This chart shows where the weakness of the system is. Many serious experts are predicting that the most likely scenario for the market crash will be a sudden spike in bond yields.

It will take a huge deflationary crash to damage the belief in our monetary system and the government's ability to control it. Only after this crash, the gold will become the leading factor in the fight against the raging inflation. 

I sold all my trading gold positions on Thursday and was happily watching them tanking on Friday for no particular reason. I kept all my silver positions and they held very well on Friday regardless of the drop in silver, so my analysis worked for the first time in a long time. I also bought some uranium stocks. I have tons of cash and am looking for viable short term trades in uranium, palladium, platinum and oil sector. 

I had to get this off my chest so I can recalibrate my mind but now I don't have the time for charts today. I promise I will try to post them tomorrow.

Please feel free to comment, I would like to know what other people think of the whole gold situation. 

Best luck to everyone,

Branko