Gold Rush Losing Glitter

Smart Money Shifts to Gold

With Billionaires George Soros, Stanley Druckenmiller, Paul Singer and what seems like every analyst on the planet talking up Gold, what can go wrong? In fact, it’s impressive that the alleged “Smart Money” has also surged into Gold ETF’s (exchange-traded funds holding Gold assets). Looking back over 7 years there is an impressive correlation of appreciating Gold prices when ETF funds attract positive quarterly investment inflows and falling prices when the tide rolls back out. This is hardly a leading indicator, but at least the previous Bull and Bear markets showing here illustrate rather persistent up and down cycle correlation until the party is over. It’s likely that any future Gold ETF inflows will be reduced compared to the stellar rush to buy gold in the 1st quarter 2016. Was this mostly Billionaires and Bear market positioned fund managers suddenly rushing in to grab prices as Oil doubled in price from its January low? OR is it as Bulls like to say: the debt levels and banking system have reached extremes that are about to send the US Dollar plunging and precious metals soaring? We think this first leg is merely a surge from hedge funds being underinvested and repositioning to hedge the general commodity rally led by oil and the implied inflation weighting.

With the global economy showing NO signs of a rebound and the Dollar moving higher recently, there is no sign of inflation pushing Gold higher. In fact global trade is slowing, backlogs and new orders are showing renewed weakness which risks reversing the primary bright spot—employment growth. In our view, Gold and Silver prices rose the 1st four months of 2016 due to a seasonal and structural supply led a rally in Oil and commodities that erased the temporary deflationary pressures. In order for precious metals to have a substantial 2nd leg to new highs >00, we will need to see the rest of the world pick up some above trend economic steam that could support alarming interest rate hikes to fight inflation.

Read Bianco: Gold a ‘High Yield’ Asset in a Negative Rate World

Another way of looking at smart money ETF flows reveals that money managers and large spec funds have also moved their net holdings of Gold and Silver from extremely negative to an even more extreme positive invested position. Silver holdings of net long futures contracts have been more frenzied than Gold hinting that, even if we are nearing a secular uptrend, prices should correct first – and in recent weeks prices are falling.

The depth of the current metals correction will be instructive as we favor some additional weakness until the June-July seasonality pass. Gold has already plunged almost /oz from its May 2nd intraday peak, but the 5 month uptrend is still maintaining higher highs and higher lows. Any decisive price drop under 12 basis August Gold would break the upside momentum – 31 currently.

Goldman Sachs is forecasting a much higher US Dollar which implies the relative economic strength and widening interest rate spreads will favor the Dollar out-performance vs our trading partners as occurred when Oil collapsed in 2014-2015. There is no doubt that a rising Dollar equates to lower Gold & Silver prices. This means the Billionaires and Smart Money flows expecting a silver lining of excess glitter from their gold will require a sharp fall in the Dollar. Either the US will become economically weaker than Asia and Europe during a renewed global slowdown toward recession OR Europe and Asia will outperform during a global recovery. We continue to expect ~ 00 in Gold to remain the Gold ceiling until the seasonal trends turn up around August. Without Money Managers selling some of their recent purchases and the Dollar falling to new lows, we would temper our excitement for metals until more data arrives.


About the Author