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 (Streettrack Gold Holdings - an ETF traded in kiasu exchange too) 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 above).
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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