What If I'm Wrong on Gold?

Yesterday, precious metals pulled back sharply, and they look to continue the pullback today. Gold miners gave up about three or four days' of gains in one day, and look to give back more today. The main impetus for this seems to be disappointment over the release of the Federal Reserves' minutes from its January meeting, which were less "dovish" than some hoped.

Since gold and silver were so overbought, a pullback isn't surprising. But I think Wall Street believes this is the start of something bigger.

The reason I think that is because I'm on friendly terms with a Wall Street economist, and we've been emailing back and forth on the subject. Yesterday, he sent me this summary of his thoughts: 

"The recent rally in gold is more related to the labor market and the 'problems' it might pose for the Fed in tapering its purchases. So you can see from today’s minutes that the FOMC remains locked-in to the theme of an improving economy. Its gentle taper should really hurt gold but for now it is not, which is down to the weather-related pause in job creation. I expect that gold might fall once job creation in the spring returns to 200k+ per month.

"Gold will also dislike any mention of lifting the fed funds rate, although as my note points out, those arguing for a nearby lift off for the fed funds rate were easily put down at the January meeting. Rising treasury yields, which would accompany resurgent economic activity, would also harm gold."

So, his view is that the rally in gold is due to weak jobs numbers -- period. That is, anticipation that the Fed will have to alter its tapering of the QE program.  My economist friend believes better jobs numbers are coming, and that will sink gold.This may be the consensus view on Wall Street.

This would mean that Wall Street economists are completely ignoring the tremendous demand we are seeing in China.  And if the Gold ETFs do a "tapering" of their own -- stop selling gold at the breakneck pace of last year -- where will the Chinese get their gold?

I think Wall Street could be in for a heck of a surprise. But we'll see. Maybe I'm the one who's wrong about gold. But I don't think so.

I think the short-term weakness in gold is due to strength in the US dollar.  The dollar and euro got to the same inflection point that they always move from.  And yesterday's Fed minutes added to dolllar strength by cooling dovish hopes.

On my blog, I've been following a chart of the UUP ... 

(Updated chart)

In the short term, the dollar/UUP could rally to the bottom of the broken up-channel (that red dotted line on the chart). That might take a week. Timing is always difficult. Anyway, the pullback will provide the next opportunity to get long precious metals and miners.

And if I'm wrong -- well, we have stops in place to protect open gains. We can always buy again later at cheaper prices.

Good luck and good trades,

Sean