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Countdown to the Gold Rally

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Short squeeze could happen in the coming days.

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I've been discussing the enormous short position that has been building in gold over the past 7 straight days of its decline, but you might be wondering why these bears are so anxious to short gold. And that's a valid question.

As far as I can tell, the bears are betting against gold based on a combination of the rising dollar index (i.e. - a belief in dollar-based "deflation"), and the fact that jewelry demand has contracted all over the world (which they think is meaningful).

For example, bears like to cite the fact that India (which is the world's largest importer of gold for jewelry) imported virtually no gold in February, which is a fact. What these bears fail to appreciate, however, is that jewelry demand for gold always collapses during a big bull market in gold, because big gold bull markets are driven by investment demand.

This displaces jewelry demand -- just as we've seen with the recent 150 tonnes of metal that the GLD ETF sucked down in February -- and an ounce hasn't sold during this decline. The same goes for silver.

This investment demand is why gold rose during February, despite dismal demand from India and weak jewelry demand globally. And the GLD ETF is obviously not representative of all the investment demand for gold globally, either, because there's more demand coming from investors that don't buy their metal through the GLD ETF.

This is where the bears are making a big mistake by shorting gold, in my view, and it should result in an epic short squeeze in the yellow metal at some point here soon.

In the meantime, if nothing else, this recent 7-day decline in gold has finally(hopefully) shattered the recent notion that gold is a bet on a decline in the stock market - which it never was and never will be. Gold is an investment in one thing and one thing only. It's a hedge against debasement of one's currency and the inflation that inevitably results from that debasement, because gold is a store of value (i.e., money) - just as it has been for thousands of years.

If gold can simply break the downside momentum and manage a rally today, we should see the squeeze begin in the coming days. If not, then it will be "day 8."

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No positions in stocks mentioned.

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