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Doldrums and Summer lows? Pining sez No!

by Pining 4 the Fjords, TF Metals Report:

With analysts at most public PM websites now turning decidedly bearish, with the summer doldrums staring us in the face, with the new rate hike raising interest rates (on paper making gold less desirable as it provides no yield), and with the gold seasonals suggesting that “sell in May and go away” was the play, there is a definite bearish tilt to the sector right now. That’s why (among other things) we have a great risk-reward setup staring us in the face.

Pining thinks it’s a great place to go long (with stops)! Let me give you a few reasons why, then I’ll outline the trade:

Sentiment:

A quick review of 7 popular and publicly available precious metals analytics/trading sites, and a glance through the comments on those sites, made clear to me that there is (at least roughly) a general consensus in the metals complex right now: after failing to break through 1300, and first pushing through then falling back below the long-term downtrend line in gold, the summer doldrums are upon us and consensus sentiment has turned bearish. The two most likely scenarios I saw discussed were either (1) we languish and churn lower for the next few months following typical gold seasonals pattern into a July or August low, or we cascade from here into an earlier low, perhaps late June or early July.

I like this widespread bearishness very much. This is precisely the type of setup the metals love; wrong-foot the investing public, going against well-known patterns (because it’s never that easy in the metals) and making sure the majority of retail is not on the train and has to chase price. That’s also why the so-so COT doesn’t bother me much, that pattern has been a bit TOO clear recently and has been becoming a little too easy to trade, so I think it’s due for a wrong-foot. In fact it is this “juking the crowd” and subsequent chasing of price on the way up that provides the fuel for the best runs in the metals. This is an excellent setup from a sentiment standpoint. Just ask yourself, when was the last time the majority of retail sentiment was dead-on correct and on the right side of the trade in the metals? Thought so.

GDJX rebalancing is behind us

Regardless of where you stood on the whole GDXJ/JNUG issue, the fact remains that it is now largely in the rearview-mirror. This means a genuine, significant source of instability in the sector is now largely behind us, removing some of the unpredictability which had been a drag on both price and sentiment. Additionally, it is likely that money managers who may have previously been hesitant to allocate funds until this nonsense was sorted may now be prepared to put that money back to work, thus bringing an unexpected tailwind that could help things to the upside. If instability was a negative, then stability should be a positive. Bullish!

Crossing over of the 50,100, and 200 DMA on the Gold Daily chart:

Don’t look now, but for all the wailing and gnashing of teeth, gold is about to see the 50 DMA above the 100 DMA above the 200 DMA. This golden cross setup is seemingly timed to catch people off-guard given the poor sentiment we see now, yet will trigger buy signals for technical traders and algos. With about 60% of stock “market” volume now quants, this is not immaterial. With a massive turnover in shares last week, especially the huge volume on Fed day last Wednesday (see black arrow on chart, look at that volume level) and follow-up churning, there has been a significant rinse in the complex. Lots of longs have been spooked out of their positions, and some shorts have covered profitably. This actually looks good to me, with Quad witching just passed on Friday, and particularly the Thursday and Friday follow-on action- no waterfalls, just tons of repositioning.

The tinfoil hat wildcard, but worth a mention: Is the Fed schizophrenic or working a plan?

Traditional analysis says that when the Fed raises rates, gold craters. Yet during this recent cycle, when the Fed raised rates Gold took off. And guess what? The Fed just raised rates. Short version- Bullish!

Long version: I actually think there is a reason for this counter-intuitive recent action in gold when the Fed has raised. Traditionally, why did the Fed raise rates, and when did they do it? They raised when the economy was getting hot and genuine fears of inflation were taking hold, and they did so to cool-off inflation and that hot economy by sucking liquidity into bonds through higher yield. So with better options (yield) available, gold (which produces no yield and is an inflation hedge) went down. But recently, the Fed has raised with (1) no real signs of inflation, and (2) and a genuinely poor economic picture. So gold didn’t do what it usually does, and in fact one could argue that gold was simply performing another of its traditional roles- that of the Safe Haven in times of uncertainty- since raising rates into a poor economy is quite possibly a recipe for a stock market crash (given that the market is in a highly overvalued position historically). In this context, gold rising (insurance) when the Fed (stupidly) raised rates actually makes perfect sense.

Read More @ TFMetalsReport.com

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