The world is not ending, no matter what politicians and TV pundits try to sell you; crisis is business, and numbers do not lie, people do. The case for being long gold at this point is WWIII and/or a deceleration in US growth. Neither have come to fruition this year; gold is crashing (-21.5% year-to-date) as US growth has been accelerating since Q4 2012.

So what would be a catalyst for a rise in the price of gold? The bull case for gold is smartly summarized by Hedgeye as: stagnating/decelerating economic growth leads to further QE initiatives, resulting in the depreciation of the US Dollar, translating into higher gold prices as investors hedge against future inflation and discount further devaluation of the currency. Year-to-date, thus far, the opposite has occurred. The US Dollar has gained relative strength (US Dollar Index is +2.67% after hitting a year-to-date bottom in February) and US CPI continues to hover around 2%.

What gold bulls have correct is that an excessive amount of currency has been created by Central Banks; as I have acknowledged in previous articles we are in a Cash Bubble. Cash, however, requires an incentive to be allocated. That incentive is growth, specifically consumption growth, which is anchored to a strengthening US Dollar. To summarize the Growth Consumption Thesis: Taper Expectations = Strong US Dollar = Commodity Deflation = Increased Consumption Growth; Hedgeye was first on this theme. An acceleration in growth will lead to an allocation of capital (a shift out of cash and an increase in the velocity of currency). This formula for growth, if it is permitted to play out without Central Bank interference, could potentially lead to an inflationary environment down the road and revive the gold bull thesis, however, it could be years away considering we are at the beginning stages of the growth cycle. What’s ironic is that as gold bulls cling to life hoping for the world to end and the Fed to never taper, what they really require is a taper, the catalyst for further growth acceleration and the linchpin of increasing velocity in cash on the virtual sideline. What gold bulls are missing entirely is: No capital allocation, No inflation; No inflation, No price elevation.

Conclusion: There is much more downside than upside risk to Gold in the intermediate-term (3-months to 1yr) due to the direct correlation of US Dollar strength to growth and gold. As always, Government remains the number one risk to growth, and if the data changes, my views will change; no one is smarter than Ms. Market and hope is not an investment thesis.

“Any dictator would admire the uniformity and obedience of the US media.” – Noam Chomsky




Alim Abdulla is an Investment Advisor at Leede Financial and is a co-founder of the Trading Analytics Group (TAG). He has been with Leede for nine years and began his career in the Financial Industry a year prior at Canaccord Capital. Alim considers himself to be an Active Risk Manager focused on long/short equity portfolios.

Disclaimer: The comments and opinions expressed herein reflect the personal views of Alim Abdulla. They may differ from the opinions of Leede Financial Markets Inc. and should not be considered representative of the research beliefs, opinions or recommendations of Leede Financial Markets Inc. The information included in this document, including any opinion, is based on various sources believed to be reliable, but its accuracy and completeness is not guaranteed. Member CIPF.