Don't trust the gold rally
Abraham George Macro View
Since last April, practically all asset classes have gone up in prices and in some cases dramatically. Household net worth , has returned to record levels. A reset of prices is taking place. But this reset has still to be felt at the every day consumption level.
Even with an improving job market, the rise in everyday prices will expose the wealth effect of rising asset prices, as an illusion. Another two trillion dollars will be like pouring gasoline into a fire. This can lead into a lower standard of living and higher inflation. So the last thing you want to hold is cash.
The historical inflation hedge is Gold but Bitcoin has taken the shine out of gold. For the first time since Bitcoin’s recent meteoric rise it is showing signs of frothiness.
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Equities
The major three indexes have been diverging over the past week. The Dow is at new highs , the S&P dropped to its lowest level since 04 Feb and the Nasdaq dropped to it lowest level since 01 Feb. Fractured trends are not the signs of a strong bull market. A drop below 3875 in the S&P could raise some doubts about the current structure.
Bonds
We actually caught the movements in the bond markets better than the other three asset classes that we follow. The daily sentiment index is at a lowest level of 15 % .
The last time this low was seen was in May 17, 2018. At that time a counter trend rally was seen for several weeks before the larger degree decline started in Nov 2018. A set back rally is not a sure thing , but if it happens the first line of resistance should be around 165^ 20.
Euro
Euro should be headed higher but the key level to hold will be the 05 Feb low of 1.1952.
Gold
Gold continues to pivot around the 1775 level. As reported in the last report about speculators being long , the small traders that fall below the line of reporting to CFTC has also increased their positions.
They are net long now 8.21% of total open interest. This is the highest level since 2013. Gold topped out at 2072 on Aug 7, 2020. Since then it has dropped $315 (15%). During this time small traders have increased their holdings from 5.03% to 8.21% meaning they are becoming more bullish as price declines.
This is compatible with the view that the gold’s selloff is not over. As prices trade lower again, small traders will tend to reverse their position again probably creating a bottom for gold. That level could be somewhere close to 1660.
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.