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Deja Vu for Gold


Bears are wrong - just like they were in 2007.

Despite gold's breaching $850 yesterday, SPDR Gold Shares (GLD) gold ETF sold zero gold, as its holdings remained unchanged at 659 tonnes. I repeat: SPDR sold no physical gold yesterday.

We also know:

  • That Indian imports were up 25% in July.
  • That they're even stronger here in August, now that the price of gold has fallen.
  • That the ECB is done selling gold for its fiscal year and its member banks haven't sold gold in months.

Gold falling below $850 therefore appears to have been caused purely by selling in the US futures market - and purely futures-driven moves don't typically stick for long.

I'd also note that DB Gold Double Short ETN (DZZ) traded within a hair of record volume yesterday. When was the prior record volume day? May 1, 2008, which was the first time gold probed below $850 and bottomed. I'd also note that the GLD ETF likewise sold zero gold on that breach of $850 back in May.

As for the miners, the XAU/Gold ratio fell 0.5% to a marginal new low at 0.165 yesterday, a ratio not seen since the 20-year bear market low in gold and gold mining shares back in 2000. The miners were priced relative to the metal as if they'd all soon be out of business: Gold was at $250 when mining was unprofitable. In other words, at today's prices, the market seems to be pricing the gold miners as if gold will collapse soon and put them all out of business. Is that rational?

Click to enlarge

Let me stress again: If the equity market is wrong about gold collapsing back to its August 2007 lows (as has been priced into the gold miners already) -- just as it was wrong about gold collapsing last August -- then the rubber band is going to snap back to the upside in an even more violent fashion than it's gone down.

That may be hard to believe, given the collapse that the miners have had, but that was precisely what occurred last year after the August low. And I obviously continue to believe that the market is indeed overreacting, just as it did last August.

Remember, those who held on to their gold and gold stocks last year because they (correctly) believed the Fed would aggressively ease and begin to inflate in reaction to the housing bust recovered from the August slide. They went on to finish the year up huge. Those who panicked and sold on the lows got left behind.

Just as they were last August, gold investors seem scared of their own shadows. This time, we're being told that the US economy and banking system will soon recover and that the dollar will rally as a result of the US coming out of the slump before the rest of the world does (Oh, and inflation will magically go to zero all by itself). We're told that gold's therefore going to collapse.
This is complete baloney, just as the theory that the Fed wouldn't run the printing presses last year was baloney. The only option for the Fed is to inflate. At this point, the problem's simply too big. Inflation's the only option, and in precisely the same stagflationary path we've been on since last August.

Just wait until China ramps back up once the Olympics are over, and global inflation reaccelerates in September. The short-term impact of nearly every industry within 100 miles of Beijing being shut down for the Olympics isn't yet fully appreciated, but come September, it will be - violently so.

Lastly: My hate-mail indicator continues to flash buy signals on nearly a daily basis for gold and gold shares (since July 29th, this buy signal has been triggered no fewer than 7 times, which is a record for any 3-week period). To top it off, yesterday I even received end-zone dancing hate mail from gold bears.

Are these the sort of conditions that mark a bottom (just as they did in August 2007)? Time will tell.
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