Want to Know What's Really Out of Favor? Gold

 | Jul 11, 2017 | 12:00 PM EDT
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The gold naysayers are everywhere. I love the gold naysayers. These were the same folks who were falling over themselves to buy at $1,900 in 2011. They're the same geniuses who say rising interest rates are bearish despite the fact that after four rate hikes and a 400% increase in the fed funds rate, gold is up 20%; about the same as stocks. 

Laugh, people. Laugh. 

In the past three weeks, something very interesting has happened. The hedge funds and probably many of these newly overconfident gold bears were all long at the top. How do I know? I know because the open interest in the gold contract hit 495,000 when we were at $1,295. Then all of these weak longs bailed out and took a bath. The open interest plunged to 445,000 and that doesn't even tell the real story, which is the fact that in that selloff, the speculators liquidated 130,000 contracts of their (net) long position. That's 13 million ounces of gold or, 408 tons. You want to know how much 408 tons of gold is? It's twice the annual gold consumption of the United States of America. 

So the specs reacted as if gold consumption in the U.S. was basically outlawed for the next two years. Smart trading. Go ahead and pound your chest. 

Now we're down at the bottom, and the open interest has zoomed all the way back up to 481,000. I can only conclude that the same people who bought at the top are getting short at the bottom. Maybe they got a $10 move in their pockets (on paper, more likely), whatever. But that'll go as fast as their paper gains at $1,295. 

The other thing that's going on with gold is that producers just keep mindlessly hedging. They're short more futures contracts than there is physical gold in Comex warehouses. Way more. They're overhedged. That doesn't necessarily mean gold is going to explode higher, but the conditions are there. 

And what are they making on those hedges? Well, if you look at the gold curve, there's about a 1.3% return on a one-year hedge (hold spot, sell futures one year out). Whoopee. Take that bonanza to the bank. Great move. 

Inflation is on the rise despite a brief respite. Have you seen the grain markets lately? Wheat making new 52-week highs day after day. Corn over $4 per bushel. Even beleaguered soybeans getting into the act, well over $10 per bushel again when, just a little over a week ago, it looked like we would crack below $9. 

Gold's still an inflation hedge, I guess people forgot. It'll respond. Sometimes it just takes a while to get the ball rolling. Best of all, I just love all the commentary about how higher rates are bearish. Keep thinking that way, people. 

Personally, I love markets that are out of favor. You can't get any more out favor than gold right now. I have no problem waiting. I'll be selling when all the chest-pounding, back-slapping gold bears will be buying.

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