What’s happening with gold should be no real surprise. Although I have stated many times that gold is money and gold should do well in deflation, and we are in deflation (see The Future Is Frugality and Implications of the Slowing Global Eonomy for the deflation case), in the initial stages of deflation, leverage in everything is reduced by force.
There are thousands of hedge funds, pension plans, and individuals over-leveraged in a massive bet against the US dollar and US assets in general. Many themes of the past 7 years are now being unwound. And one would expect leverage to be forced out in deflation as credit simply dries up. I call this the great unwind.
The Great Unwind
- Short US Dollar – Long Commodities
- Short US Dollar – Long Foreign Equities
- Short Financials – Long Gold
- Short US Equities – Long Foreign Equities
Gold will reassert itself eventually along with the short financials trade, but as the great unwind continues, the unwinding process for those in gold can be painful.
Bear in mind that gold disconnected from the US dollar in 2005 for the entire year, so it could do so again. Furthermore, there is really no way to tell just how long the unwinding can last. However, given that commodities were essentially a one way bet for the last seven years, the unwind can last a lot longer than commodity bulls might think.
Gold and Silver Seasonality
Another factor to consider is gold and silver seasonality. August through January is generally a very favorable timeframe from gold and silver, so that might (or might not), slow or even reverse the effects of the unwind.
One additional point is that silver, unlike gold, might easily act more like an industrial commodity and less like a currency than gold. Gold’s primary role is that of money. Silver is a higher risk/higher reward offering when it comes to deflation.
Euro vs. Dollar Weekly
click on chart for sharper image
The Euro has broken the weekly trendline, but barely. Unless it reasserts itself, a drop to the 200 day Exponential Moving Average (EMA) near 137 might reasonably be expected. There is also support at that level from the last major breakout.
Manipulation Theories Debunked
Many claim that that dollar was rising because of manipulation. Such claims are completely baseless and were totally debunked in Currency Intervention And Other Conspiracies with a followup in the second half of Fannie, Freddie Common Stock Is Now A Call Option.
Commodity Supercycle Intact
It is likely that the commodity supercycle is still intact. Oil is not headed back to $30 although a move back to $70 or even lower can easily be in the cards.
However, commodity bulls are likely severely underestimating both the great unwind and the Implications of the Slowing Global Economy. A cyclical downturn in commodities is clearly underway.
There are now screams of “gold manipulation” just as there were currency manipulation. I will not suggest there is no manipulation, but I will suggest that manipulation if and when it occurs does not work.
I had an interesting Email exchange with Nick at Sharelynx Gold just a few days ago over manipulation claims. We were discussing gold’s rise to $1000 and Silver’s rise to $20.
Nick commented “Personally from my seat where I follow all my data I did see it as intervention – to help the cause – but then nothing new in that I think. I saw it as a little jab forwards for the US entering into the Beijing Games – a shot across the bows so to speak – much like we’ve seen Putin’s shot across the bows.
I agree about the bit that if we’ve had manipulation from gold at 250 up to now then bring on more of it.(:-)))
I do think it exists & lots more than most imagine but that in the long run it’s all temporary support & Mr Market keeps on rolling along.”
There is no reason to believe that dollar manipulation or gold manipulation is the driving force behind movements in gold, silver, and currencies. Never believe conspiracy theories or screams of manipulation when far simpler explanations such as the Great Unwind explains things quite nicely.
Mike “Mish” Shedlock
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