I've been bullish on gold since December; see my article here in the archives, "Why I Turned Bullish on Gold". I reduced my position as gold swooned in the second quarter after a $200 run. I added to positions at $1240, and we rallied about a hundred dollars as of last week. Gold is down 30 bucks as I write this and I think there could be more than meets the eye.
It's true that geo-political events are lessening, but they are usually temporary and gold investors know this. It's also true that speculation has increased in gold lately and a lot of the speculators jumped ship today and set off stops. But the whole rally from the first of the year, in my view, was predicated on higher inflation and increased world growth for 2014.
The most recent data is reversing and putting that thesis to the test. Even as the economic and investment community is debating whether the Fed is behind the curve on inflation, and the public is suffering under high gas and food prices, both are falling and the underlying commodities are falling dramatically as of late.
Crude has fallen 11 out of 12 days and hanging on barely to the $100 mark. The CRB, which tracks commodities, has turned down suddenly and broken the 50 day moving average of 307 and is near challenging its 200 day support level of 293. Agriculture commodities are crashing in some cases. The Power Shares DBA Agriculture (NYSEARCA:DBA) ETF has broken through both the 200 and 50 day moving averages. Corn has fallen from $5.20 a bushel to $3.78 in just two months, a 27% drop. Corn feeds livestock and cattle prices are beginning to fall. Just as people are becoming alarmed over inflation, it is possible that it just peaked. Gas and food prices are likely to fall, and fall soon.
Meanwhile, on the world growth front, France fell to zero growth in the first quarter and to date is running at negative growth. Germany and Japan are turning down and looking surprisingly weak lately. China is struggling, England is faltering and Canada's unemployment just ticked up to the highest since last summer. Then there are the PIGS: Portugal, Italy, Greece, and Spain, which are back in the news as a new euro crisis has suddenly appeared. I could go on, but the bottom line is the worldwide recovery is now in question.
Retail spending here in the US is said to be in a "funk." And through all of this, the Fed is tightening even in the face of the money supply, which has gone flat. M2 has hardly moved since the first of the year. And perhaps this is why many inflation indicators have suddenly turned south.
Gold's drop today could be confirmation of a return of the deflationary/recessionary bias that has been plaguing the world for six years now. I'm a nervous bull given the sudden reversal of data that contradicts the inflation/growth scenario. Maybe the bond market has it right: that we're headed the other way.
As an investor and trader, I alerted my subscribers of my concerns last week. I sold all leveraged positions in gold stocks such as Agnico Eagle Mines (NYSE:AEM) and ETFs such as Market Vectors Junior Gold Miners (NYSEARCA:GDXJ). I have kept my core position in gold and silver stocks, but today bought the Direxion Daily Junior Gold Miners ETF (NYSEARCA:JDST) as a hedge against the portfolio with a close stop.
I have not yet changed my view on the year as a whole, but today's fall in gold could be a shot across the bow of the recent gold rally. If the world economy picks up even slightly along with inflation, it will represent a change in direction. I believe that is what moved commodities led by gold in the first quarter of the year. Commodities sensed higher future demand.
Even as US GDP was falling 2.9%, commodities rallied. This in my view was the expectation of world growth in general picking up as the year progressed. In fact, we saw signs of improvement in China and the eurozone indicating better growth ahead, and this in the negative first quarter of the year. Then the data began to turn, and with it so did gold, falling back from the $1400 area, to the $1180 area in the second quarter.
By mid-June the data once again began to look promising and gold and most other commodities rallied. It wasn't until about ten days ago that we saw the problems of European banks become an issue again. Gold rallied as a safety play and was buoyed by geo-political events. But it masked the continuous fall in the oil and agriculture sectors. This may be of no importance in the long run, and could be due to independent factors at play in these individual markets.
Gold's dramatic downturn today, however, confirms the down trend of the other markets and the bond market. I still think the preponderance of evidence is on the side of worldwide recovery, higher demand for commodities, and therefore, higher inflation rates to come. But if oil, agriculture and metals continue to fall, it is deflation and recession that the world needs to fear -- not inflation.
Disclosure: The author is long AEM, GLD, JDST. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.