Gold: A Massive Short Squeeze Opportunity

Fundamentals

Gold is volatile because interest rates are rising fast. The talk is about how the Fed is going to control the record level of inflation, which is at a 40-year high, by increasing interest rates. The 10-Year Note hit 3.50, which is why there was the recent correction in the equity markets. Now the 10-Year is down to 3.070. If we get down below 3 percent, then the market is already discounting expected future inflation. Fundamentals always lag the market, so the market has already factored in more inflation and higher interest rates. The market appears to have already taken into account the Fed’s talk of raising interest rates .75 points at its next meeting.

“The only one who knows where things are going is the market,” Equity Management Academy CEO Patrick MontesDeOca said.

The US dollar has been challenged due to the tremendous amount of stimulus that came into the market in response to the pandemic. The Fed balance sheet hit $9 trillion.

The fundamentals appear to be out of sync. We could see some tremendous volatility in the markets over the next few months.

With debt reaching $30 trillion, rising interest rates are already putting pressure on the tail end of the debt, especially those who are heavily leveraged. Every one percent increase in rates on the $30 trillion is $300 billion in increased payments. The war in Ukraine is devastating the supply chain and driving up food and energy prices. The Western economies are under great stress due to the war and disruption in grain supplies from Ukraine and energy from Russia.

The underlying fundamental picture is pretty bullish. The Fed is in a dilemma about how fast they need to increase interest rates to catch up with inflation. However, the market has already raised interest rates – doing the Fed’s job for them. It is just a matter of time before rising prices and rising interest rates hit other assets, such as precious metals, but also anything that is financed, such as shipping rates, housing, car purchases, and so much more. Even if we have a 3 or 3.5 percent yield, if inflation is at about 10 percent, we still have a negative yield in relation to inflation and the purchasing power of the US dollar.

The Fed cannot raise interest rates aggressively because it will destroy the world’s economy. Debt defaults will ripple around the world. The challenge is to keep rates reasonably close to the market rates, while not crippling the economy. It is a fine balancing act.

Wheat and Other Commodities

Wheat came down from $13.635, which was the March 8 high when Russia invaded Ukraine, and has been volatile ever since. On May 18, it hit $12.80 and reverted back down to or below a 61.8 percent retracement of $9.74. The correction of the first leg might be reaching the level where it will revert again back up. This sort of movement has happened across the board for metals, grains, and energy. Highs were hit when Russia invaded Ukraine, and then the markets came down and adjusted to the reality of the war. Many markets appear to be about to activate buy triggers.

Gold and Standard Deviation

Nikki the Robot provided the weekly gold Standard Deviation Report based on the artificial intelligence of the Variable Changing Price Momentum Indicator (VC PMI). The weekly trend momentum of $1871 is bearish. The weekly VC PMI of $1844 indicates a bearish price momentum. A stop above $1844 stop will negate the bearishness to neutral. If short, take profits at the Buy 1 and 2 levels of $1805 to $1767. If long, take profits at the Sell 1 and 2 levels of $1881 to $1920.

Gold has seen a lot of volatility. It has stabbed into an area of accumulation, as supply begins to come into the market. We have activated a buy trigger and are long the market on a close above $1826. Every time the market has come down into these levels, the market has reverted. The VC PMI predicts that if the market reaches a buy level, then it is likely to revert back up toward the mean of $1844, which is the weekly average. The yearly average is $1849. The market is nearing the yearly average. On the 16th we hit $1861. Since gold is trading below the monthly average of about $1849, the market has a bearish momentum. This area appears to be important for gold, by identifying the area where the weekly and monthly trends come together.

Overall, the market has factored in rising interest rates and the war in Ukraine. Now we are waiting to see what the actual damage will be and whether the market factored in the right amount. Mortgage rates have almost doubled in six months, but time will tell whether that is the right amount as interest rates rise and the war continues.

“It is going to be really difficult for interest rates to go higher,” MontesDeOca said. “The economy needs interest rates to go down, which is the opposite of the fundamentals. If interest rates do go down, we are going to see a massive move to the upside in commodities.”