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Very high sentiment readings last week, up to 20:1 bulls:bears. Quite a change from a few weeks ago, when traders were bearish by 4 or 5 to 1.
If the tide is turning back to the deflation trade, expect a rout in commodities like the second half of 2008. Yes, gold rose as stocks and other commodities fell last week, but it did the same thing when it first broke $1000 in early 2008 as stocks fell into the Bear Stearns crisis. The corellation with stocks could easily switch positive again as it did in ’08.
BTW Mike, where did you get the DSI statistics for gold? It’s kind of extreme to jump from 15% bulls to 95% within 1-2 weeks.
There is a significant difference between 2008 gold and present. In 2008, gold rise was accompanied by oil & other commodities. In addition, it was also accompanied by the dollar plunging to the all time low of 70. At the time, I still remember the tone was fear of inflation.
Right now it’s different in several ways:
1. it rises w/ other commodities plunging.
2. it rises w/ the dollar.
These two are very important differences. So, what we might be seeing here is a change in character. In early 2008, it was just a case of all inflationary assets going up to the skies. The character now is I think more to the risks of sovereign default & the likes, rather than inflation. Tick-by-tick observations show that gold is accelerating to the upside if the market plunges. Now… if these 2 correlations hold, gold should go down if the market & euro are up, which could well take place based on the Euro statistics you mentioned.
Mish once mentioned that gold’s rise is more related to global credit event (default), e.g.
1. it rose in GD 1929 from $20 to $35
2. it rose in 1970s from $35 to over $200 (Nixon made USD irredeemable for gold – effectively the US defaulting on its debt)
3. it rose in 1999-2008 due to elevated risks in global credit event because of the inflating of housing bubble.
4. it didn’t rise in 1989 because Japan’s bust was not considered a huge risk of global credit event.
This is just a different perspective of how we see gold. Of course, we can look at it in the perspective that it’s another commodity bubble, like nickel in 2007 & oil in 2008. But I think this is worth considering because of the differences I mentioned.
Hi Roger,
Gold is certainly not just another commodity — it is money. Roy Jastram showed in The Golden Constant that over 400 years it gained purchasing power during deflation and lost it during inflation, even when there was no gold standard.
Gold’s corellation with equities and other commodities comes and goes. You can’t count on it since it has a mind of its own. DSI bullishness was 1:5 in mid-March. The reversal to over 10:1 took 10 weeks, with extremes being reached as of last week.
I’m not 100% counting out a serious spike here, but I’m very cautious towards gold ATM and am inclined to think 1000 is more likely than 1400 by summer.
Of course I own physical and think gold should keep going up vs. other commodities, stocks, wages, real estate, etc. I just put a lot of stock in sentiment data.