Like a true contrarian, Gold Newsletter publisher Brien Lundin looks beyond the headlines to understand what is really moving precious metals prices. He has concluded that the mainstream media may have it all wrong. Suspected anchors on the gold price such as an interest rate increase and devaluation of the yuan could actually be a rallying cry for commodities, he says in this interview with The Gold Report.
The Gold Report: You recently implied in an article titled "The Cocked Trigger" in Gold Newsletter that the current prevalence of short gold positions is actually a good thing for gold prices, especially if the Federal Reserve raises rates. That goes against everything we've been led to believe. Why do you say that?
Brien Lundin: We have an unusual situation in the gold market right now in that in the Commitments of Traders reports by the U.S. Commodities Futures Trading Commission, for the first time, the managed money sector has a net short position in gold. Typically, speculators have a net long position, and the commercials-jewelers, bullion dealers, etc.-have a net short position because they have to hedge. But the speculators are now net short, and the commercials have their lowest short position ever. It is a set up for a short covering rally at some point.
Add to that the possibility of a Federal Reserve rate hike at some point, and we could see a big, unexpected move upward in gold. I think the timing of a rate hike has been overhanging the gold market for well over a year. Relieving that issue could actually prompt a short covering rally. It would be kind of a sell-the-news event where the shorts figure that the trade is over and this is a good time to begin covering, more and more head for the door, and we have the rally underway.
TGR: You also said the Chinese currency devaluation could be a spark for increased gold buying. Will that be a similar sell-the-news scenario?
BL: Yes. The initial announcement devalued the yuan by about 2%, which of course increased the price of gold and other commodities by 2% for Chinese consumers. So you would think that would be a negative. However, it wasn't a one-off devaluation. It was a new currency regime in which the yuan would be allowed to float more freely against world currencies and, in fact, would be allowed to drop against world currencies, in particular the U.S. dollar. So Chinese consumers, the investors and savers domestically who have been buying gold hand over fist, now think that the yuan is going to be depreciated over time, so their incentive to buy gold is heightened. I expect that the devaluation will actually increase gold demand in China.
TGR: A recent Barron's article classified commodities as the most out-of-favor industry group in the global stock market and then concluded it's time to buy commodities. Does the fact that a mainstream publication is making this prediction mean we're not yet seeing what Rick Rule calls complete capitulation?
BL: I think we saw something very near to complete capitulation in gold on July 20 when speculators attacked the entire metals market through orchestrated flooding of short sales onto the futures exchange. Due to greater demand from China and now greater safe-haven demand from Western buyers, gold prices should continue to rise.
TGR: As we move into the fall busy gold equity buying season, you seem to be shifting your portfolio to companies with proven resources. Why now?
BL: Because there is no need at today's price levels to accept exploration risk. There are a few special cases in exploration that I like and will still recommend going forward, but I have been shifting our portfolio more toward companies that have proven world-class resources, some of them with economic studies in hand. I think these will be the first movers in a metals price rebound. Companies with large-scale resources offer the same upside potential that an exploration play would have provided a few years ago, and they're selling for about the same price with a lot less risk.
TGR: Thank you for the time, Brien.
This interview was conducted by JT Long of The Gold Report and can be read in its entirety here.
With a career spanning four decades in the investment markets, Brien Lundin serves as president and CEO of Jefferson Financial, a publisher of market analyses and producer of investment-oriented events. Under the Jefferson Financial umbrella, Lundin publishes and edits Gold Newsletter. He also hosts the New Orleans Investment Conference.
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