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Gold Rallies After Tough Stretch


Pullback is over for yellow metal.


I made the case back in early May in various Buzzes that the combination of 1) the flood of gold related hate mail that I received on April 29th, 2) financial media recommending people buy 2x short gold and commodity ETFs and ETNs on May 1st and 3) the positive divergence between gold and the euro probably marked the low for the correction in gold, which conveniently went back and retested the old 1980 peak of $850 on May 1st and hasn't been back since.

After spending most of May slowly working its way higher, gold has sold off for three straight days this week as the euro-dominated dollar index has risen back to near its mid-May peak. As of this morning, the euro is lower again and the dollar index is higher, yet gold is rallying and up over $8. For me this divergence says this three-day pullback is likely over, and the uptrend in the shares and metal is about to resume.

I would also note that the selling in the gold futures for the past three days (like by bears watching the euro slide and betting against the metal) was never supported by any selling of physical gold from the GLD ETF. In fact, GLD purchased another six tonnes yesterday into the face of the decline. When was the last time we saw action like this? Interestingly enough, it was back at the end of the November/December correction in gold (see the chart below).

Click to enlarge

I'd also note that after repeatedly failing at the downtrend line since the October peak, the GDX/GLD ratio about as close as it has been to taking out this downtrend since October. Doing so would be a signal that the gold shares are now in a position to vastly outperform the metal, just as they traditionally always do in a gold bull market.

Click to enlarge

Let's see… oil is over $120, gold has broken out of a 30-year trading range above $850, and the bond market finally broke to a new low for the year yesterday too? Hmmm… Anyone smell any inflation?

Meanwhile, most of the herd remains in denial and is still praying for some sort of disinflationary Shangri-La to magically appear as the dollar and stocks rally and inflation goes to zero overnight as commodities collapse. That's a nice bedtime story for children, but this is the real world. Inflation is not going to magically go away and allow all the money and credit growth that's now occurring to pour back into financial and real estate assets and "reflate" them, as occurred repeatedly following busts in the Greenspan era. That game has been played once too often and is now over.

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With a broken fiat dollar based monetary system and a broken US banking system, stagflation is now the name of the game, and the Fed can't do a thing about the "flation" component of that stagflationary soup due to the continued fragility of the US economy and banking system (see yesterday's report from the FDIC if there are any doubts about the banking system's continued fragility).

As I've said before, one must embrace this stagflationary environment or be crushed by it.

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Position in GLD, gold shares

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