Let the Capitulation in Gold Begin?

Since my last post, gold has dropped over $60 in a matter of weeks. This is not good, especially because the “mandatory” dollar rally appears to have arrived. To review, the dollar became the carry trade currency of choice due to artificially low interest rates. This creates a situation where the slightest uptick in the dollar forced investors to buy back dollars to unwind their trade. This, of course, leads to another rally in the dollar. This is the “mandatory” feedback loop we are witnessing right now.

As I’ve said before, gold will cycle between going in the same direction as the dollar or in the opposite direction. Right now, they are trading in the opposite direction, which is very bearish for gold. It is very likely that this relationship will remain until the crisis in Europe and Asia matures and infects the U.S.

The dollar is rallying with stocks and real estate. Gold is trading in the opposite direction. This suggests that the big money is finding a haven in the dollar, real estate, and stocks. They are NOT finding a safe haven in gold just yet. The movement in these assets has little to do with the retail investor. It has more to do with the early stages of outright capital flight from Europe.

It appears that gold will correct right into the crisis window in Europe. Interesting developments are occurring throughout the world, including the Scottish vote for independence, which I think is the type of movement that will spread worldwide. China and Japan are beating the war drums even louder. These are long-term trends, so they take awhile to develop. This is not the same thing as a company missing quarterly earnings by $0.01 and selling off. In other words, markets will tend to trade counterintuitively for longer than you’d expect. It’s normal.

At the very least, we live in uncertain times. Markets will react eventually, and it will be worse than it was in 2008. Too many negative cycles are converging.

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  • geetkhare

    Global oil supply of 94 million barrels per day needs to fall by about a tenth if it is to match consumption, Venezuela’s Oil Minister Eulogio Del Pino said on Monday. capitalstars