The Love Affair With Gold Was Only A Fling

On May 4, 2016 in our article Can Gold Sustain This Rally?, we wrote:

“If the Dollar does not bounce off of its lower-range boundary of 92.50, then gold could continue higher…”.

As it turned out, the dollar never closed below 92.50, and gold has been dropping in price ever since. This is a vindication of our opinion that there was no fundamental support for gold’s sharp rally. Our view has been that the FED was, and is determined to raise rates and is willing to use any excuse it can think of in order to do this. We regarded the emotional reaction by the gold bugs (lovers) as a misreading of the FED’s intentions. The gold bugs, along with the hedge fund speculators who jumped on the momentum train, not only assumed that the FED had abandoned the idea of rate hikes for the rest of 2016, but mistakenly interpreted this as equivalent to a RATE CUT, thus causing the sharp rally.

ANG Traders saw this as a mispricing of gold and, therefore, counseled investors to short gold. For this, we received a surprising number of vitriolic comments which we were not expecting. We have to admit that we underestimated the aphrodisiac effect that the metal has on many individuals and, therefore, we were too early in positioning our shorts. The last two weeks, however have allowed us to make-up for this error and we expect that there is still more downside to enjoy in this trade.

The dollar still has room to the upside since it has only recovered 40% of its range-trade. No one should expect a straight line move to the upper limit, but with the FED rate-hike warning in place, chances are that we’ll see continued strength in the dollar and reciprocal weakness in gold.

The CME FED watch tool is pricing-in a 60% chance of AT LEAST one hike by the end of July and this should keep both the 30-year bond and gold back on their heels until then. Notice, in the chart below, that the change in price direction of gold (pink circle) that was expected following the divergent trading between gold and the 30-year bond (green rectangles), was very short-lived. Gold and the 30-year bond, are once again trading in sync.

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