The fog of war is driving gold...

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The Fog Of War

Good news...bad news...not-as-bad news — every fresh piece of real or imagined information sends markets tilting to and fro.
 

The lesson: Ignore the volatility that Western investors have brought to the market, and keep focusing on the powerful long-term drivers for this bull market.

Trillions in market value can be quickly created or destroyed these days by just a few words.

That lesson has been taught emphatically so far this year.
 

First, we had the announcement of Kevin Warsh as President Trump’s next Fed Chairman. As you can see from this chart, that late-January news bomb put an end to the furious new year rally in gold.

Gold quickly recovered from that crash, partly from the powerful monetary fundaments behind the market, but also as the metal priced in the upcoming attacks on Iran.
 

Then, again, gold dropped as that conflict sent oil prices flying higher, and traders dumped all risk assets in anticipation of the inflationary impact and the resulting more-hawkish Fed policy.

Now we’re seeing another recovery in gold (and so silver and mining stocks) as the weight of rumors leans toward a negotiated settlement in the conflict at some point over the next two or three weeks.

Those smaller wiggles in the line are reflecting the day-to-day...and intraday...flow of rumors regarding the conflict and the status of the Strait of Hormuz.
 

It may seem like there are a number of varied drivers underlying all this volatility, but in fact there’s only one: The impact of Western traders.

Hot Money Sloshing Around The Globe

As I’ve chronicled over the last couple of years, this gold bull market has evolved in a unique fashion, with central bank buying being the primary driver at the beginning and through most of its history.
 

That started to change late last summer, when we got the first indications that Western money was finally jumping onto the trend. The first clue was a sudden outperformance in mining equities last August.

The implications of this development were tremendous because, after decades of ever-easier monetary policy by central banks, there are figurative oceans of liquidity sloshing about the world’s markets.

Consider that there was about $100 trillion in investible assets globally before the Great Financial Crisis of 2008. Thanks to accelerated central bank liquidity creation since then, there’s now about $270 trillion looking for parking places.
 

Now consider what happens when those oceans of liquidity try to pour into the shallow little lagoon of metals and mining.

According to my AI, there’s only about $4 trillion-$6 trillion in investible gold and silver in today’s world. And gold/silver mining equities, at between $600 billion to $700 billion in total, are a tiny fraction of that.

So only about 2%-3% of total investible assets are currently allocated to gold, silver and their associated mining equities.

Just a 1% shift in allocations would therefore double the gold market...or completely overwhelm the mining share market.

That sounds great for gold and silver bugs...but there’s a dark side to this as well.
 

Last summer as we started to see Western money jumping into the metals and mining trade, I warned that we should be careful what we asked for.

Yes, big-money flows from traders and investors would help fuel powerful rallies, but this would also bring much greater volatility as these hot-money flows gushed not only in, but also out, of our relatively tiny market sector.

That’s precisely what we’ve been experiencing.

The danger is that, now that we’re finally being proven correct in our long-term views on why gold is headed to far higher levels, we’ll lose sight of the fundamentals and get shaken out of our positions by the sharp volatility.

Don’t let that happen.

The debts created by decades of ever-easier money demand much more rapid depreciation in fiat currencies, and this will bring ever-greater relative valuations for gold, silver and mining stocks.

At this moment, the metals are in another recovery stage. This could last days, weeks or a few months.

No one knows, but it simply doesn’t matter over the long term, if we maintain our nerve and stay positioned.

This doesn’t mean we shouldn’t take profits, and even take those profits completely out of the market, along the way.

At the same time, we should maintain a strong bias toward monetary metals and mining, to not only protect our wealth but build it like never before.

All the best,

Brien Lundin
Publisher, Gold Newsletter
CEO, the New Orleans Investment Conference

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