By Mike Norman
Gold is trading down sharply today. My guess is that we're seeing more long liquidation. There's a large contingent of speculative longs in the market, as indicated in the most recent Commitment of Traders Report from the CFTC. While that speculative net long position has come down from the highs of July 5, it needs to come down further, in my opinion, before the market can resume its bullish trend. If the longs are liquidating today, as I imagine they are, then that's a good thing for gold.
Gold's bull trend is not over. I say this as someone who is, admittedly, not a fan of gold. However, I'm also a trader, so if I see an opportunity I will take advantage of it. Gold's rise is being driven by rising fiscal stimulus, i.e., rising deficit spending, not just here in the U.S. but also in all the major industrial countries. It will get a further boost from another Fed rate hike when that happens. That's how the current rally began. It got going when the Fed hiked rates last December -- the first rate increase in nine years -- and gold went from $1,080 an ounce to over $1,300 an ounce.
As I have explained, rate hikes equate to price increases. Raise the cost of credit and that trickles through to all other prices in the economy. In addition, since the government is a net payer of interest, higher rates necessarily increase government spending (all else being equal). So rate hikes are inflationary. Central bankers may think they're putting the brakes on inflation when they raise interest rates, but they're not. They end up doing just the opposite.
Personally, I am happy the weak longs and zombies are getting flushed out of gold right now. This will go far in discounting the next Fed rate hike and stemming the selling that's likely to occur when that happens.
When I look at gold and stocks, it makes me think back to that "big idea" trade of George Soros and Stanley Druckenmiller. Remember that one? "Sell stocks and buy gold?" Back in May, early June? I called both of them out on that trade. I mocked them because they're supposedly savvy investors. What a joke. Their "rationale," if you want to call it that, was based on all the same misguided theories of the many financial quacks we see all over the media all the time. Utter nonsense.