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Gold Melt-Up Coming?


With one extreme tends to come the other. Gold fits the bill.

You have to take risks. We will only understand the miracle of life fully when we allow the unexpected to happen.
-- Paulo Coelho

In the fixed income space, the most hated area of the bond market has been long-duration Treasuries (NYSEARCA:TLT). In the equities space, the most hated area of the stock market has been emerging markets (NYSEARCA:GMM). In the commodities space? It's been gold (NYSEARCA:IAU). Historically, gold tends to do well in negative real rate environments. The collapse in bond prices, concerns over European gold selling to raise cash by government institutions, and fears over India's demand for the precious metal has caused many to aggressively sell.

But melt-ups happen when you least expect it. Much like how sentiment on emerging markets (which I call the "fat pitch") is extreme, so too is the sentiment on gold. Meanwhile, there is some better relative price movement underway right here, right now. Take a look below at the price ratio of the SPDR Gold Trust ETF (NYSEARCA:GLD) relative to the SPDR S&P 500 ETF Trust (NYSEARCA:SPY). As a reminder, a rising price ratio means the numerator/GLD is outperforming (up more/down less) the denominator/SPY.

Gold relative to the S&P 500 (INDEXSP:.INX) peaked at the height of the summer crash of 2011, and it has been in an absolutely brutal period of underperformance since then. I suspect much of this has been a repricing of the inflation story, which was so hyped over the past decade, with the metal serving as a "hedge" against inflationary concerns that never materialized. However, with one extreme tends to come the other. The ratio against equities seems to be turning up, in sympathy with the fat pitch and long duration bonds as investors try to play massively oversold trades.

Could a melt-up soon come? If not now, when?

Twitter: @pensionpartners
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No positions in stocks mentioned.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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