"Back up the truck"

Good grief — After its dramatic push past $1000 in March, gold is back to where it was at the start of the year.  But our gold man in Vancouver, Ed Bugos, says keep the faith…

In percentage terms, gold’s current pullback is still second to the one that occurred in the summer of 2006, but only by a few points.  It would have to fall back to $765-ish to match that one.  The gold stocks, on the other hand, are in the midst of their absolute worst correction to date, with the HUI off some 40% from its March peak, and the XAU down about 35%.  The chart says there could be some more downside but my momentum indicators are all oversold in the short term.  Moreover, the slide technically looks more like the final part of an intermediate capitulation than the beginning.  There’s a good chance that the market will rally off an oversold condition some time this week.  I don’t know what might happen after that, but the fundamentals are at odds with the action. 
Speculation that the global economy is weakening is adding weight to the rout in commodities, but gold is getting thrown out with the bathwater.  The US dollar is strengthening not because of any bullish fundamental fact, but because the market sees the European Central Bank as caving on the inflation “fight.”  The fundamentals are bullish for higher gold prices but the market has to work out the volatility in oil and currencies in the short term.  The rising cost of production and mine development may be bearish for gold stocks but they are bullish for gold prices, as is the government’s creeping centralization of the financial sector, and ever entrenched inflation policy.

Gold bears are convinced that the commodity correction will alleviate the inflation problem, so the central banks can keep rates low.  My guess is that, in the short term, there will be a few inflation scares in the “inflation data” in coming weeks that might give gold a boost – unless the market thinks the Fed would hike rates in response.  But I think the Fed is not going to want to upset the deadcat bounce on Wall Street, and I think the correction in gold and oil will lull it into a false sense of security about inflation.  I doubt Wall Street will get the same bang for its buck as it got from the 2006 correction in oil prices.  So I don’t think this Phillips curve conundrum that the Fed faces is going to find a fix in this correction.

The market’s budding love affair with the yellow metal is going through a rough spell. 

But the final vestiges of the Goldilocks era are fading away, and the conditions are ripe for the market to realize that the economic good, “money”, is just as important to the economic engine of growth as the economic good, “energy.”

Investors should come off the sidelines and back up the truck this week. 

When the market warms up to gold, it’ll make moves that in hindsight make this correction look like the 1987 crash in stock prices on a chart today, or like the 2001 correction in oil prices – pretty insignificant.

Much more from Ed here.