Gold – a sick trade gets sicker (not sick as in a rad / cool – sick as in critical condition)

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From Verdmont Capitalverdmont_cap

It has been a bad week for gold.

You have had mounting concerns about a US default and gold has done dick all – in fact , it has gone down. 

This begs the question – if gold can’t rally when there are concerns of a US default – when can it?  This is a seriously broken trade.

You could argue that golds weak performance is because the market is  assigning zero probability of a default – but you would be wrong.

You have seen activity in the treasury market that indicates participants are positioning themselves for a potential default.  Granted, not massive shifts, but shifts none-the-less.  Money market participants have been balking at short term US paper on concerns the Government will fail to meet its short term obligations.  This is reflected in rising yields on 3 month paper.  You will also notice that this differs from securities further out on the curve, which have actually come in.

Treasury Curve – Current and 1 Month Change

goldchart1

If you have been involved in the market for a few years, you will recognize this for what it is – incredible.  Sure, small changes, but the fixed income market is nervous about the US Governments willingness (not ability) to service its debt obligations.

Gold performance over this time period… down…

Gold – 30 Day Performance

goldchart2

As you know, gold moves as a crisis hedge and/or as an inflation hedge.

Confidence in gold as a crisis hedge is seriously wounded. That’s not an opinion.  That’s a fact. If gold can’t rally when there are concerns of a US default, it won’t.  Sure, the crisis hedge status of gold will resurface at some point.  But right now, no one cares, and why would they?  How did holding gold work out for them during the last systemic shocks to the financial system? Poorly – when there is a dash for cash – nothing is spared.

The other driver, gold as an inflation hedge, will probably cause the next leg up in gold. The growth at all cost strategies being employed by central banks, and rampant currency devaluation (low interest rates) will ultimately stoke inflation.  That said, there are no signs of this as of yet in headline inflation data, which remains at very subdued levels.  Sure, officials get creative with inflation data, sure inflation is showing up in various asset prices, but it is not a concern at the present time with the general public.  No one cares.

So, no one cares about golds crisis hedge status and/or its inflation hedge status – why would you? This will of course change, but serious short term catalysts have yet to emerge.  Sure, gold will go up in the long run.  Doesn’t everything though?  Even Japanese stocks are presently going up.  If you were there for the last 20 years though, does that make you right? 

The selloff in gold has been painful.  With many false starts as traders try to time a bottom.  Each attempt at upward momentum has ended in tears.

Why be a hero and try to make the first 15 – 20% off the bottom?  If the returns in gold and gold stocks are going to be as monstrous as the bullish arguments suggest, why not wait for some confidence to return to the market first? 

We are sticking with our thesis on gold that we have had since it was testing/broke support at $1,600/oz.  As we wrote in April of this year:

“we are looking for a combination of the following: a gold chart that makes a series of higher lows / a gold price that begins to react positively to bullish factors / endorsements by some high profile investors / indication that depressed prices will severely impact supply / a stabilization in the redemption of ETF holdings by retail investors”

These conditions are not yet prevalent.  No one cares about gold.  Until they do, we are happy to be on the sidelines.

Please call with questions.


This report was prepared by Verdmont Capital

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