Geopolitical Noise Distorts Price Signals

Brien Lundin Brien Lundin

Brien Lundin

April 22nd, 2024 Comments

Gold’s gone on another wild ride today, plummeting in price as late-arriving speculators sell on calming tensions in the Middle East.

We’re getting the smash we’ve been expecting. The question now is whether it will turn into a “smash and grab.”

Anyone waiting on the sidelines for gold to go on sale is getting just what they asked for today.

Gold began diving right as trading opened overseas last evening, and the plunge gained steam in New York trading today.

24 Hr Spot Gold (Bid) Kitco Chart

As I write, gold is down nearly $60 (2.5%) and has yet to show any significant resistance to the selling pressure.

In fact, the price has reached lows not seen since... last week.

Kitco Charts - Gold Prices

The longer-term (one-month) chart above puts today’s selling in some needed perspective. A chart going way back to the March 1st beginning of the uptrend would show even less impact from today’s move.

That said, I don’t want to minimize this correction. This is an important test of the buying demand that has driven the price of gold nearly $400 higher since the end of February.

It’s still too early to determine precisely who’s selling (we may never know) and how low the price will go, but here’s what I’ve been able to glean so far...

Weak Hands Leave Early

This rally in gold has been interesting and likely unprecedented, as it has been notable for the relative lack of participation from Western investors and the nearly desperate buying from other sources, including central banks in general and the People’s Bank of China specifically, along with heavy demand from Chinese citizens.

The holdings in big gold ETFs like GLD had actually dropped severely in the early stages of the price uptrend and remained stagnant throughout. However, open interest in “paper gold” on the Comex did rise as the price gained ground.

Along with this rise in open interest, we saw the speculative hedge funds buying heavily, as represented by the “managed money” category of the disaggregated Commitments of Traders report.

Consider the chart below from our friend Nick Laird:

Gold COTs - Speculative Positions (World Gold Charts)

As you can see, hedge fund positioning soared as the price rose, but plateaued in late March, even as the gold-price rally continued higher.

My view is that this positioning got spooked as Armageddon failed to materialize in the Middle East and seized that opportunity to take profits. The limited retaliation by Israel over the weekend seems to have been the last straw and prompted many of the speculators in paper gold to cover their trades as soon as trading opened this week.

The result has been the price smash that we’ve been expecting at some point. The question now is whether the buyers that started this rally to begin with will continue their buying...and perhaps buy even more now that the price has dropped.

Testing Conviction

Much of the buying behind this year’s big move in gold has been mysterious. While we were among the first to point out the remarkable magnitude of official and domestic buying from China, I’ve been commenting in recent days that I felt there was something else — some other big buyer or buyers — in the gold market.

Regardless, the motivation for this massive gold demand is a general move away from dollar hegemony and toward the independence granted by gold.

That motivation would seem to be enhanced after the U.S. Congress approved the confiscation of Russian assets over the weekend.

Whether this previously price-insensitive buying continues unabated after this sell-off or perhaps increases as a result of the lowered price, remains to be seen.

What we can surmise at this point is that the correction will test the convictions of bulls. Those convictions were notably weak, but sentiment was beginning to improve in recent days, as evidenced by the improvement in mining stocks and the release of some bullish gold research by powerhouse Wall Street firms.

Whatever resolve there was in these quarters will be shaken now, but a bounce-back in demand and the price would quickly get things back on track now that the geopolitical noise in the macro signal has been reduced.

We can also take heart in the fact that the big catalyst we had been counting on — a Fed pivot — is still ahead.

I can’t tell you that gold won’t continue to drop from here. No one can (and don’t believe anyone who says differently.)

What I can tell you is that everything we’ve seen so far is a sign that we are definitely in the end game of an ever-easier money trend that began over four decades ago. Although we can’t tell when it ends, it’s obvious that the water is circling quickly around the drain now.

Gold is the insurance, and investment, that you’ll want to own as this process plays out.

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Brien Lundin

About the Author:

Brien Lundin is the publisher and editor of Gold Newsletter, the publication that has been the cornerstone of precious metals advisories since 1971.  Mr. Lundin covers not only resource stocks but also the entire world of investing. He also hosts the annual New Orleans Investment Conference. To get Brien Lundin’s ongoing commentary on the markets at no charge, click here to subscribe to his free Golden Opportunities newsletter.