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Tuesday, January 31, 2017

Gold outlook

I must say that I am extremely hesitant giving a Gold forecast. The fact is that I have not had a losing trade on the precious metals for over 9 months and the longer this goes on, the more likely I will be spectacularly wrong.  Add to that many smarties, including one sharp-shooter I know personally, are taking the opposite side of what I feel, makes me very uncomfortable.
With that caveat, let’s look at the evidence.

Pros for the bull market.

1)    The USD has peaked. I called the USD top a couple of weeks back and I think  it will be one for at least another 8-10 weeks. It could also most likely be a major, major top. Full Disclosure: Long GBP/USD since 1.21. It is hard to imagine a major move down in Gold in the face of USD weakness, at least in USD terms.
2)    The sentiment levels at the $1,125 bottom reached some of the most extremes of pessimism. Those have historically marked major bottoms.
3)  TLT-USD/JPY-Gold correlation is still running high and the smart money is very bullish on bonds. If the correlation continues, Gold and TLT could make a big move up together.

Pros for the bear market.

1)  COT sentiment never reached the depths of despair that we see at major bottoms. The relentless buying in silver futures in the face of silver weakness is also quite unusual.
2)   I have a few indicators that I do not share, and unfortunately you can take this for what is worth….they are still warning me that big slide is likely ahead.
3)    Gold is so expensive relative to every commodity that I think a massive bear market in Gold relative to other commodities is overdue.
Gold vs Platinum: Full disclosure: I am long PPLT short GLD for 10% of my portfolio.

This is Gold versus commodities. Looks like Gold is severely oversold, but if the 2016 high was the final top Gold has a lot of room to fall versus commodities.

And my favourite, the Gold: oil ratio which has averaged 15 since 1972 (after gold price was unfixed). I think this is due for a mean reversion to 12 and I just cannot see oil breaking $70 in the next 12 months. Yeah that means a $840 Gold to me. However, a case could be made that as we move away from fossil fuels, Gold could get permanently revalued higher against oil. I don't think we are there yet, but if that happened, Gold: Oil could permanently find a new floor at 20. 

To me the weight of the evidence paints me moderately bearish. But I have no positions except the Platinum Long versus Gold Short and a very tiny position short NUGT Feb calls.

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