Gold—Inflation Disconnect
The comments below are an edited and abridged synopsis of an article by Adam Hamilton
Gold should be soaring with inflation raging, but instead it is breaking down. Gold’s decoupling, however, is a short-lived anomaly driven by a parabolic US-dollar surge fueling unsustainable heavy gold futures selling.
Hamilton discusses gold’s recent history; the reason behind soaring prices of everything; hyperinflation of the dollar; current raging inflation; gold’s vexing disconnect; recent interest-rate hike cycles; the unwinding of money supply growth; the euphoric dollar slamming gold; the radically overbought dollar and equally oversold euro will violently mean-revert soon; gold futures selling will not last; speculation selling on both sides of the trade is effectively spent; the overbought dollar will soon roll over; and gold will accelerate.
Hamilton says that this gold selloff is a gift. Dollar weakness will drive gold higher as the oversold euro rebounds. Gold futures specs will have to buy to cover their shorts or face catastrophic losses. That will accelerate gold’s gains, attracting long-side gold-futures buyers, then investors with their larger pools of capital.
The bottom line: Today’s apparent gold/inflation disconnect is a temporary unsustainable anomaly. Gold went higher on balance as normal during the first year of this inflation spike. But a few months ago, the dollar went parabolic on incredible Fed hawkishness. That spawned heavy gold futures selling, hammering gold into a serious technical breakdown.
The overbought, euphoric and overcrowded long-dollar trade is overdue to reverse sharply. And speculators’ capital firepower to sell gold futures is largely tapped out, based on multi-year trends. So when the dollar inevitably rolls over on a less-hawkish Fed or a more-hawkish ECB, gold will soar on massive mean-reversion gold futures buying. That will attract investors, accelerating the upside.