The Oversold Gold Market Creates An Asymmetric Opportunity With This Strategy


Over the last couple of weeks, I’ve written about the ongoing transition from a global trade war into a currency war.

This year so far, we’ve seen the Argentine Peso, the Thai Baht, and Turkish Lira get decimated. But it’s not just Emerging Markets with ‘soft’ currencies being affected.

The Australian Dollar’s also performing very poorly – same with the Canadian dollar.

This shows you just how fragile the world’s currencies are when there’s a currency war – no one’s safe.

And unintended consequences spread like flames of a fire. . .

I wrote earlier this week that over the last two decades – gold’s never been shorted like this before.

Take a look yourself. . .

Gold’s down over 11% since 2018 began – thanks to heavy short sellers and a rallying U.S dollar.

But remember this important phrase: when something has record shorts, it will have record buybacks.

For instance, when someone shorts something – they’re borrowing it.

The idea here is that traders are borrowing someone elses gold contracts – paying them a bit of interest for their time – and then selling the gold on the open market.

Then – if gold falls in price – they have to simply ‘buy it back’ at the cheaper price and return it to the original owner. And the trader nets the difference as a profit.

That’s how short sellers make their money.

You can see here then that eventually – all this record gold shorting will turn into record gold buying. Traders must buy it all back to return it.

This will cause gold demand to increase – pushing prices up.

Don’t believe me? We saw the same thing happen with the dollar last year. It dropped 14% between January 2017 and February 2018 – and then in early March – short sellers started closing out (buying back) their positions.

The dollar’s rallied 6% since then.

But this edition is to show you just how attractive I think gold is today and how you can make spectacular gains from its inevitable rise using this strategy. . .

First let’s go over why I think gold’s going higher. . .

The Federal Reserve is tightening monetary conditions with rate hikes and something known as ‘quantitative tightening’ (known as QT).

QT is the Fed selling the bonds that they bought during the ‘crisis’ years back to the banks – which basically sucks the money out of the system.

As far as rate hikes go – the Fed’s planning to raise rates 0.25% at least two more times this year (that will make it four total in 2018). The next time will be in September – and followed by December.

The Fed’s also pulling out $600 billion dollars per year with their QT program.

Be aware that in the Fed’s 105-year history – this type of ‘tightening’ has never happened before. This is basically one big financial experiment as the Fed put it.

Combining the rate hikes with the QT is very aggressive tightening. And in my opinion, the market doesn’t quite understand how this will affect asset prices.

And with interest rates up this year – and much higher since the Fed began tightening back in December 2015 – the tightening is being felt throughout markets. . .

Rate hikes in a fundamentally healthy economy are okay. But the U.S. economy today is far from ‘okay’.

As I’ve written about – corporations and consumers are up to their neck in debt. And the housing market is especially weakening since 2018 began.

Sure – the recent quarter’s GDP (growth domestic product – the preferred measure of growth for economists) came in at 4.1% – which is pretty high. But three-fourths of that was from debt fueled consumption (not healthy in the long-term) and increased exports.

The increased exports are important for two reasons. . .

  1. The dollar’s still down significantly since January 2017 – which has boosted exports

  2. Exporters hurried to move inventory abroad before retaliatory tariffs hit

Therefore – last quarters artificially high GDP numbers won’t last. And it will be much lower in the coming quarters.

Unfortunately – the PhD’s sitting around the Fed’s table don’t acknowledge this. At least publicly they won’t.

They go on extending their growth assumptions, give bullish speeches to universities and banks, and continue tightening. In fact, the Fed Chairman – Jerome Powell – increased the amount of rate hikes projected for 2019. He thinks the economy is healthy enough to raise rates even faster.

As usual – the Fed’s holding their breath and hoping for the best.

But a lot of 2018’s artificially boosted growth has already started to reverse. . .

Did you know that over the last decade, annualized real U.S. GDP growth over 4% happened four times. All of which were followed by zero-to-negative growth in the next few months?