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SPOOs Hit Another All-Time High

06-25-2021

The indices marched higher again through midday, led by the Dow, which gained two-thirds of a percent, aided by a more than 10% gain in the price of Nike stock. In the afternoon, a decent chunk of the gains evaporated, although the market still closed a bit higher, as you can see in the box scores.

Away from stocks, green paper was flat, fixed income was weaker, especially at the long end, while the metals gained a little ground, led by silver, which added almost 5% compared to a few dollars for gold. The miners were their usual desultory selves and didn't do much.

Eyes on the Price(s) On the subject of gold, I know there's been a lot of angst and a lot of disappointment that it's done what it's done recently, and prior to that, this spring and over the last year. Every time there's a decent-sized correction people seem to get despondent. However, it's important to keep in mind the reason to own it, which is that these cumulative central bank mistakes are leading to quite a good deal of inflation.

The issue now is that the vast majority of people believe that inflation is transitory, which is why when Powell basically said nothing at the last FOMC meeting (except that they might raise rates 25 basis points in a year and a half instead of two years), the metals market fell out of bed. The fundamentals matter over time, but in the short run (months, weeks, or days), positioning, and by extension, psychology, matters more.

Back to Flushed On that front, the setup for the metals is quite constructive. The DSI fell to 16 yesterday, which is just above the March low, even though gold is about $100 higher. Also, the Hulbert Gold Sentiment Index is at -9.7%, meaning that gold newsletter writers were recommending a small (net) short position. According to the note that I read, that puts it quite near a percentile from where rallies have begun.

Then if one looks at the CFTC data, it's quite constructive. Meanwhile, the fact that the open interest is the lowest it's been in a year indicates that a lot of futures markets players have been washed out.

Thus, the stage is set for a rally. That doesn't mean one will commence, it just means that the conditions are quite ripe for that to happen. In addition, the actual news and facts are quite supportive of higher prices. The only question is what might spark the rally, and I can't answer that. I can say that people's view of transitory will be challenged on a regular basis and, regarding the Fed, we must remember that we may have reached peak dovishness, but marginally less dovish does not equal hawkish. (Thanks to the Lord of the Dark Matter for making that point so succinctly.)

Stickier Shock On the subject of transitory, certainly some prices won't maintain the increases they've seen and will back off, but whether they go back to where they were is highly debatable. Meanwhile, some price increases/hikes will stick, and I think there are a lot more of the "stickier" variety than most people seem to realize, particularly on the labor front and given the disruptions that we've seen to the supply chain. All one has to do is read some of the anecdotes in Ask Fleck to see how complex this all is.

On the negative front, it's the end of the quarter, and since the metals and the miners have been under pressure, maybe they will do poorly for the next few days, as folks with a negative bias mark their positions. Nevertheless, the conditions are in place for a rally to commence, so I'm pointing it out for those who've been waiting for a moment like this. Obviously, I can be wrong, as I often am, especially trying to call turns in the metals market, thus it's something I don't try to do very often because it's so easy to be incorrect.