Gold Investment Bleeding

The comments below are an edited and abridged synopsis of an article by Adam Hamilton

Almost every trading day, stock investors sell GLD and/or IAU shares faster than gold itself is sold, forcing the ETFs to sell bullion. They have to do this to fulfill their mission of tracking the gold price.

Gold Investment Bleeding - BullionBuzz - Nick's Top Six
Gold Bars Close-up with shallow DOF (3D artwork)

They raise the capital to make these purchases by selling some of their gold bullion. As gold falls on gold-futures selling, investors flee, pulling their capital out of gold. That should be running its course soon.

Total spec longs have dwindled to a 3.3-year low, while total spec shorts remain near their 3.7-year highs. Once these hyper-leveraged traders have sold all they can, it only leaves room for buying. So huge mean-reversion buying to normalize bearish bets soon erupts out of such extremes. That will send gold sharply higher.

With inflation raging out of control thanks to Fed money printing, today’s potential buying is far bigger.

The US dollar’s purchasing power is eroding, and stock markets are in a bear market due to Fed tightening. So the investment case for gold today is strong. Eventually investors will realize they need to diversify their stock-heavy portfolios with counter-moving gold. During these past six months the CPI averaged a scary 8.5%-YoY gains.

The irrational gold/dollar situation reeks of another extraordinary popular delusion. Even lowballed CPI inflation is running at its hottest since the 1970s, and real-world inflation is double or triple those headline numbers.

It takes many more dollars to buy anything today than it did a few years ago, so it is madness for the US Dollar Index to be trading at multi-decade highs, the sole reason gold futures selling has been so extreme.

Gold won’t lose its purchasing power as the dollar burns down. For centuries, gold has been the go-to investment during times of monetary debasement and raging inflation. That won’t end because of a temporary gold-price distortion fueled by unsustainable gold-futures selling that must soon reverse. As gold comes back, investors will return in droves.

Gold will quickly mean-revert higher as gold futures short-covering fuels gold futures long buying, which ignites investment buying. Within a few months, gold will rebound to the $1,900—$2,000 area.

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