For the first time in a long time, the sentiment backdrop recently became supportive for the gold price. However, the true fundamentals have been trending in a gold-bearish direction since early-October of last year (after having been supportive for almost a year before that) and still constitute a headwind for the gold price.

When it comes to assessing gold market sentiment, the Commitments of Traders (COT) report provides by far the most useful data. This is because it shows what speculators, as a group, are doing with their money in the part of the market (Comex futures) that is subject to the greatest sentiment swings and that has the greatest effect on short-term price movements.

At the moment, the total speculative net-long position (the inverse of the blue bars shown in the middle section of the following chart) is at its lowest level since June-2019. This implies that speculators are now less interested in gold than at any time over the past 20 months. Of greater importance is that the open interest (the green bars shown in the bottom section of the chart) is not far from its lows of the past three years. This is important because the gold price tends to bottom when the futures market open interest is relatively low.

Chart source: http://www.goldchartsrus.com/

The COT situation tells us that speculator enthusiasm for gold is now at a low ebb relative to the past couple of years, which is bullish given that speculator sentiment is a contrary indicator. At the same time, though, the fundamental backdrop remains bearish.

In broad-brush terms, the fundamental backdrop is bearish for gold when confidence in the economy and the financial system is high or increasing and bullish for gold when confidence in the economy and the financial system is low or decreasing. Confidence may seem like a vague concept, but it can be quantified using interest-rate spreads, price ratios and other market data.

The Gold True Fundamentals Model (GTFM), a weekly chart of which is displayed below, is my attempt to quantify the fundamentals that matter to the gold market.

When the fundamental backdrop is gold-bearish the best that can be reasonably expected from the gold price is a multi-week countertrend rebound, even when the sentiment situation is supportive. That appears to be what’s happening at the moment.

I expect that the fundamentals will turn in gold’s favour within the next three months as the US economy and many other economies around the world begin to shift from strong economic rebound to “stagflation”. However, they haven’t turned yet.

[Below is an excerpt from a commentary published at TSI last week. It is our latest monthly review of the short and intermediate term prospects of the US economy. Just to be clear, a boom is defined as a period during which monetary inflation and the suppression of interest rates create the FALSE impression of a strong/healthy economy.]

We think that last year’s US recession ended in June plus/minus one month, making it the shortest recession in US history. The latest data indicate that the recovery is well and truly intact.

Of particular relevance, the following monthly chart shows that the ISM New Orders Index (NOI), one of our favourite leading economic indicators, remains near the top of its 20-year range following a pullback in January-2021 and a rise in February-2021.

The ISM NOI leads Industrial Production (IP), so it isn’t surprising that the year-over-year percentage change in IP has experienced a rapid rebound from its Q2-2020 trough (refer to the following monthly chart for the details). More importantly, based on the latest NOI number, other leading indicators and the inevitability of additional stimulus from both the Fed and the government, IP’s rebound is set to continue. The IP number for March-2021 will (not might) indicate year-over-year growth.

The performances of leading and coincident economic indicators show that we are well into the boom phase of the boom-bust cycle, meaning that the economic landscape remains bullish for industrial commodities and bearish for gold. Therefore, it’s reasonable to expect the continuation of the rising trend in the GYX/gold ratio (industrial metals relative to gold) clearly evident on the following chart. Be aware, though, that on a short-term basis this trend appears to be over-extended.

The economic strength that was predicted eight months ago by leading indicators and is starting to become apparent in coincident indicators is largely artificial. This means that it will evaporate soon after the Fed is forced by blatant evidence of an inflation problem to end the monetary stimulus.

Our thinking at this time is that the period of strong economic growth will be followed by a period of what is often called “stagflation”, that is, a period when “inflation” accelerates in parallel with slow or no economic growth, because the Fed is not going to stop creating new money at a fast pace and the US government is not going to stop spending at a fast pace anytime soon. If so, then during the post-boom period commodities could continue to do well but gold should outperform almost everything.

However, we’ve learned from bitter experience that during the boom it’s best NOT to look ahead to the inevitable economic denouement. Instead, the focus should be on “making hay while the sun shines”. Near the end of the boom there will be timely warnings in the real-time data, but at the moment such warnings are conspicuous by their absence. This means that the boom should continue for at least another three months and could continue for much longer than that.