-- Posted Wednesday, 19 May 2010 | | Source: GoldSeek.com
By Andrew Mickey, Q1 Publishing
The hottest trade in the world is imploding.
Last Friday we noted how a hot new “Carry Trade” was the driving for behind the gold’s record run.
As the short Euro/buy gold trade was going parabolic, the trade was reaching its final stages:
These carry trades move in fairly defined cycles: They start off with solid fundamentals, then the Big Money piles in, it goes parabolic, good “stories” bring in the retail investor, and the trade eventually blows itself up.
We’ve entered the story stage and, if history is any example, there’s not much upside left to go.
Since then the trade has started to unwind very quickly. Today the near-worthless Euro is up more than 1.3% and gold is off more than $30 an ounce.
It’s a big divergence and signals this correction is driven by the unwinding of the carry trade. After all, there’s no justification for a rebound in the Euro and today we got some of the best news for gold in a while.
Fools Rush Out
As gold prices fell this morning the sell-off was exacerbated when the latest inflation report sent gold traders running for the exits.
Today the Bureau of Labor reported inflation, as tracked by the Consumer Price Index (CPI), actually declined 0.1% last month. The core CPI, which excludes food and energy prices, was unchanged for the second straight month. And with the recent fall in oil and agriculture prices, it’s sure to be significantly lower next month.
So it was natural for Wall Street, which still looks at gold as an inflation hedge, to start dumping.
But here’s the thing. Today’s inflation report was actually great news for gold. And it all comes down to the fundamental driver of gold prices – real interest rates.
As the chart below shows, there’s a very strong correlation:
That’s why today’s inflation report is great news for gold. With no official inflation now or on the horizon, the Fed will continue to keep short-term rates at zero.
On top of that, the sell-off in the stock market and Europe’s debt problems have sent investors back into U.S. Treasury Bonds in a big way. That has pushed long-term rates down even lower. The rate on the 10-year T-Bond hit 3.36% - just 20 basis points away from its 1-year low.
Long-term and short-term rates are poised to stay low for quite some time. And when rates are this low, they inevitable create negative real interest rates which leads to high gold prices.
Start Getting Wound Up on Gold Now
That’s why we’re looking to move back into gold now.
The sharp sell-off in gold caused by the unwinding of the short Euro/buy gold carry will, in time, be viewed as a buying opportunity.
We know the mechanical market situation over the short-term. We know the fundamental situation over the long term. And when there’s a short-term sell-off in an asset with great (and improving!) fundamentals, we know it’s an opportunity.
Gold prices are going higher and fortunes will be made. Just take a look at what happened last year when we identified five significantly undervalued gold stocks in our most recent gold report.
The five gold stocks detailed in them climbed 1646% while the price of gold climbed 13% over six months time last year (follow this link to get your own copy of the report – 100% Free). That’s more than 100 times higher return than gold.
The gold bull market is alive and well and this sell-off, although sharp and unexpected by most who weren’t paying attention to market mechanics, will not last long.
Good investing,
Andrew Mickey
Chief Investment Strategist, Q1 Publishing
-- Posted Wednesday, 19 May 2010 | Digg This Article
| Source: GoldSeek.com
