Deflation & Speculation: Is The Gold Price Facing A 2013-Style Crash?

As the price of gold continues to surge, do stretched positioning and deflation risks threaten a 2013 style crash for XAU/USD?

Are investors fleeing one bubble just to land on another? | Source:

  • Gold prices are booming, as XAU/USD is now above $1750
  • The rapid increase in demand for the safe-haven metal has stretched market positioning to extreme levels.
  • If no headline inflation appears, is gold set to crash like it did in 2011?

The gold price is booming. As bugs dream of record highs and the collapse of the U.S. dollar, there could be a speculative abandon forming.

Is it the same kind of dangerous bubble that fans of the haven metal see in the U.S. stock market?

Gold Powers Above $1750 As Positioning Gets Stretched

As the Federal Reserve has embarked on a historic monetary stimulus program, gold bulls have driven XAU/USD above $1750.

The gold price continues to soar. | Source: Yahoo Finance

To reach these lofty heights, speculative traders have piled into the market in droves. When market positioning gets hugely one-sided, the potential for a correction increases. Investors can get caught in a liquidity trap as longs are cut en-masse.

As you can see from the current positioning, gold bulls are in one of the most crowded trades in the commodity sector.

Speculators can’t get enough of the yellow metal. | Source: Wall Street Journal

The CFTC COT report demonstrates that commercials are extremely short XAU, suggesting they may believe that the risk of a correction and/or the price is exceedingly high.

Negative Rates & Trillion QE – Where’s The Inflation?

Fear of inflation remains the primary driver for the appetite of gold. A recent excerpt from famous gold bull Peter Schiff’s column best sums up this point of view,

There are already trillions of dollars in bonds trading globally with negative rates. This makes no sense in a sane economic world, but we don’t live in a sane economic world. We live in an economic world distorted and manipulated into some kind of weird Alice in Wonderland fantasyland by central bankers.

In order to send the price of gold into the stratosphere, we need to see inflation.

So far, the coronavirus pandemic has provided deflation, and for all the Fed’s efforts to kill the USD, it’s trading quite firmly.

This is a matter of perception, as XAU/USD, XAU/EUR, and XAU/JPY are all higher. Bugs can point to this fact as evidence of inflation that doesn’t show up in the central bank’s CPI data. Elevated home and stock prices are more signs of stealth inflation.

However, if headline inflation doesn’t start showing up in conventional data, gold will start looking ripe for a correction.

Is a 2013 Style Crash In the Cards?

In 2011 an all-time high above $1800 was seen in the futures market. This came as the world’s central banks were doing everything they could to create inflation, and all fiscal hawks fears came true.

XAU/USD tumbled for about five years after that peak, as inflation stubbornly refused to appear, and the dollar firmed with the rejuvenation of the U.S. economy.

Once again, we have a significant economic emergency, and this time the money printing is even bigger.

Speculative abandon may be pushing the gold price beyond fair value. | Source: Mark Dow via Twitter

With trillions of digital dollars flooding the economy, XAU bulls believe the deflationary spiral is over.

If it’s not, they’re sitting on a major bubble.

Disclaimer: The views expressed in this article represent the author’s opinion and should not be considered investment advice from The author holds no investment position in the securities mentioned above.

Last modified: September 23, 2020 1:57 PM

Francois Aure: Financial speculator & author living in the hills in Los Angeles. J.D. but very much not a lawyer. Favorite trading books are anything written by Jack Schwager. | Follow Me On Twitter | Email Me