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