Our trading is focused on the thesis; “No one knows the value of his markets like those who pull it from the ground.” While individual companies or operations may be prone to mismanagement or other bad decisions, the collective actions of the companies within a given sector are rarely wrong. The tug of war between those who pull it from the ground versus those who process it determines true price discovery within the commodity markets. These are the elephants bulldozing the macro moves while the speculators compete for the remnants with the dung beetles. Recently, large speculators have been stocking up on gold futures at a record pace and the gold miners are selling all the forward production they can lock in above $1,220 an ounce. This could lead to quite the washout as speculators are forced to take losses under $1,280.
The precious metals markets have picked up steam fueled by negative interest rates and poor stock market performance. We’ve discussed the dislocations governmental policies can create within the markets extensively since the economic collapse and the new era of Economic Engineering at length in the past. Briefly, in a negative rate environment, investors feel more secure owning something that may be worth more in the future, like gold, than owning something with a guaranteed decay, Japanese bonds. This is not the place to argue storage and insurance versus the cost of the negative rate or, currency valuation versus the appreciation of goods owned. The economic theory is sound over the long run. However, we’re here to make money in the short-term and the long-term. Therefore, we see the recent rally in gold as being fueled by those late to the party. Frankly, anyone who bought gold above $1,100 per ounce may be in for some pain if they don’t lock in profits.