Gold Deflating?

I have a general rule about commodities. Whatever gold is doing, it is generally a leading indicator for what the CRB is going to do. So for example, when gold shot to the moon a year ago, that to me indicated the CRB would be making a big move upward as well. Sure enough it did. Gold then plunged and so did the CRB. Interestingly though, the CRB along with most commodities has continued this move lower, while Gold has basically hung around the 700-750 range. Now I heard on Fast Money tonight that gold is doing nothing. Well, doesn't that tell you something? If the market were truly deflationary, would gold be trading somewhat strong relative to other assets? That is the question I am asking myself tonight. This is not to say that I am about to get real bullish on gold but it does beg the question: what is gold telling us now?

Now before I proceeds, lets get something out of the way; this market sucks, plain and simple. Today was another vicious drop in the S&P and it appears we are at least poised to test 800 tomorrow and perhaps the 770 level of 2002. I remember that time period all to well as I was trading it via the big S&P (when the mini was basically in its infancy). Swings during that time were much the same today, if you adjust for the volatility of the periods (obviously now being much higher). The 800 level became a pivot of sorts during that time and the bulls bears volleyed back and forth. Meanwhile, gold was finding stability, after selling for for a while - that stability, combined with Mr. Green's affinity for flooding the market with cheap credit, led to the 400% move from 250 to the eventual 1000 level mentioned earlier. The S&P interestingly has done and round turn back to the 850 level - conversely, the gold market has not down a round turn and has held basically 3x its value of 2002. What does this indicate?

It indicates that perhaps all these deflation scares are unwarranted. Many are saying that the drive lower in the bond market is an indication that deflation is taking hold. That is all and good but lets review some facts. First, Copper is still above 2004 levels. Crude is roughly 100% higher than 2002 levels. The long bond and the 10 year are now getting towards the 2003 deflationary scare period; 3.20% and 3.80% respectively. Lastly, if the US economy were deflating, the USD would be sinking - just ask the Japanese about their deflationary problems and the movements of the Yen! Now, if you happened to look at the level of the CPI month to month, it was down the most in 60 years. At the same time, the year over year figure is 2.2% on the core - that is not deflationary by any means. The consumer could retrench dramatically, which I guess is already occurring judging by the daily bankruptcy toll in retail - a factor that could drive core inflation lower. But that is not occurring at the moment.

So again, what is gold telling us? Well I think it is more complex than just one factor. First and foremost, it is arguing that there is much demand for gold and bullion these days - that makes sense given the volatility in the marketplace. In addition, there is demand for gold on the inflationary prospects side (money supply figures alone could lead to this conclusion). Finally, there is the fear factor of other assets deflating. Countering this is the CRB broad commodity deflation - I believe if the CRB were steady, gold would be over the $900 level and not the current $740 area. However, since every hedge fund who was bearish on the markets is in liquidation mode (even the winners are liquidating), that puts additional pressure on the price of the yellow metal to rally. Thus with these factors running into each other, you get a gold market that sells off one day and then rebuilds over the followings days.

So what is my outlook for gold? Well with each day that the yellow metal holds the 700 level, I get more opportunistic. I would be very encouraged to see gold rally with the stock market on a bounce (if that is indeed coming). The meaning of a gold bounce could mean much of anything but the bottom line, it will bounce which is what the inflation bulls have wanted to see. This in turn could levitate other commodity markets as they buy into the gold as a leading indicator story. In any event, I see gold at least stable around the 700 level with the potential to trade to the $900 level within a month or two.