What's Next For Oil and Gold?

 | Aug 29, 2017 | 12:01 PM EDT
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A couple of weeks ago I said that I liked gold. I said I was long gold. I told you to buy gold because the fundamentals were bullish and it would go up. Well, that's exactly how it worked out. Now I see a lot of people coming into gold who I would call fair weather gold investors. They rush into the metal when it looks good; when prices are rising. They didn't buy the dips like I did and they didn't ride through the downturns when so many were saying that gold's move was over.

You have to understand what drives gold and I certainly do. I was completely confident in my position during the times when it went against me because I knew it would turn around. I have been long gold basically since December 2015, when the Fed first began to raise rates. Each rate hike since then, as others sold, I told you to buy. I said that rate hikes were inflationary and therefore not harmful to gold. On the contrary, rate cuts are gold's "Kryptonite." That's because rate cuts are price cuts. People always seem to get that wrong.

I almost dumped all my gold back in July because Janet Yellen said the Fed was "almost done" hiking rates. This unnerved me because she didn't seem to know what she was talking about at the time. She kept mentioning the "neutral rate" when speaking of interest rates. The only neutral rate is zero for a currency issuer. A positive rate is not a "neutral rate." A positive rate is stimulative. It adds income by the very fact that it's positive. If you are adding income you are not neutral. Long story short: I held my gold and I am glad I did.

Next month the Fed is expected to start unwinding its balance sheet, small at first, but ramping it up gradually. This will not be contractionary as many people believe or fear. It's basically putting income back in the economy that the Fed had stripped out via its asset purchases. Again, that's not negative or even neutral. It's positive.

Finally, we still have to get through September and that means a budget must be passed and the debt ceiling needs to be raised. Both of those things are potentially disruptive if they are not resolved. These things could cause gold to stall if they interrupt normal fiscal flows (government spending). We'll see.

You may have noticed that I didn't even mention North Korea. That's because I cannot deal in things that I can't predict. The situation has flared up again and that's driving people into gold, but I was in gold long before that based on the fundamentals, not things that come out of left field which are then open to interpretation by the emotional crowd.

The more I think about it, when I see all the weak people running to gold now it makes me want to take some profits.

I want to turn my attention to oil which has been hit with selling thanks to Hurricane Harvey. Harvey is a brutal storm that has shut down oil rigs in the Gulf and shuttered about 15% of U.S. refining capacity. You'd think that would be bullish for oil, but it hasn't been. The reason is, those refinery shutdowns. With that much capacity down the crude is just going to sit there in storage as opposed to being used. There won't be any drawdowns. Instead, we could be facing some very large inventory builds in the next few weeks.

Mind you, this doesn't erase reality and the reality is that crude inventories are now at the lowest level since January 2016. You may recall what happened in January 2016. It was the bottom of the oil market crash. I should know, I called it right here on Real Money. Oil went on to double in price from that point.

I'm not saying that oil is about to double again. We're going to have to get through these inventory builds first and I'm sure when market participants see them they're going to sell. That's the only way they know how to interpret such things. Not surprisingly, this may be the exact wrong thing to do. In this current selloff producers and swap dealers have been net buyers of crude as it has traded lower. Only speculators have been dumping their longs and going short.

You know what this tells me? It tells me that weak hands are running away and strong hands are stepping up to the plate. That's not bearish, it's bullish. Maybe not for today or this week, but it's bullish. I'll be looking to buy oil on dips.

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