We are seeing some major moves in various assets today. Equities are breaking up higher and several lagging sectors are on fire, but let us look a little closer on gold.
Gold has performed very well this year, especially since June. The narrative of buying gold because of falling yields and buying the shiny metal for the “global hedge” has developed almost a mania around gold over past months. The fundamental case has been adopted easily by most people out there, resulting in very long positioning in gold, but the question remains do people really want to be this long, or is it mostly a bet on the classical “greater fool theory” where the next fool will buy higher than yourself?
Whenever there is a very strong one-way view in an asset, we watch it closely. When price action starts reversing in such a set up, we watch it even closer.
The steep trend in gold is still intact, but price action today is brutal for the longs. A close below 1500 is key for gold. We know of very few shorts, and there are many CTA funds long the yellow metal, so watch the 1500 level.
The ISM survey rebound started the yields move today, and as we all know the biggest fundamental reason for gold longs has been the ever-imploding yields. If yields continue what we are seeing today, gold could be up for a bigger move to the downside.
Below is a chart of gold and the US 10-year yield. The relationship is clear.
The gold mania has attracted many new “fundamental investors”, but the problem remains these “guys” are not long-term investors. Should gold start breaking below the big 1500 level, we expect a lot of the new “fundamental investors” to start getting nervous.
The first instinct, and what people do badly, is they start doubling down, buying more. That will work but only if gold stays above the 1500 level.
Note the huge volumes during this last move higher in gold (GLD US). Smart guys, retail guys, hedge funds etc are all long gold in good size. Do you want to be one in the crowd?