The Fed trap is tightening

Gold is getting hit as bond yields surge. But look at why yields are rising, and the message for gold becomes much more bullish.

Gold is getting punched in the mouth again today.

And if you’ve been following this bull market for any length of time, you know that’s not necessarily a bad thing. In fact, it may be giving us exactly the opportunity we’ve been waiting for.

Because this gold bull market has changed.

For roughly the first 18 months of the move, central-bank buying was the dominant force. Sovereign buyers steadily accumulated gold, largely insensitive to price, and helped propel the metal higher without the kind of meaningful corrections we would normally expect.

That phase is over.

Not the central-bank buying, mind you. That remains an important underlying source of demand.

But over the past year, Western investors have returned to the market in force. And with them have come the hedge funds, futures traders, momentum players and, increasingly, algorithmic trading programs.

The result? Volatility — stronger rallies…deeper corrections…bigger swings in sentiment in both directions.

That volatility creates victims.

But it also creates victors...for those who understand how to use it.

Buy the dips, skim the froth

There’s an old lesson in investing that becomes especially important during powerful bull markets.

Once you’ve determined that you’re in a secular bull trend, you have to resist the temptation to become bearish during every correction...and equally resist the temptation to become euphoric during every rally.

It boils down to this: You buy the dips. And when things get frothy, you skim some profits off the top.

Simple to say, but much harder to do when prices are moving quickly and every headline seems to confirm whatever the market happens to be doing that particular day.

Which brings us to where we are now.

Gold emerged from its first real correction in early August. Western trading helped drive that correction, just as Western traders helped fuel the powerful rally from those lows.

And now those same forces are pushing gold lower again as bond yields have gone vertical.

The knee-jerk explanation is straightforward: “Higher yields are bad for gold.” But there’s a problem with that explanation: Gold was initially rising right alongside those yields.

Why?

Because both markets were responding to the same thing: Fear. Specifically, growing concern over enormous sovereign debt loads, persistent inflation and the accelerating depreciation of fiat currencies.

That’s why we need to look beyond short-term price action.

Two lessons…

I think the current metals weakness means we have to remember two important things….

First: The long-term drivers for gold remain firmly intact.

In fact, I’d argue that the surge in sovereign bond yields around the world is telling us that some of those drivers are intensifying at this very moment. Consider the emerging crisis in France, which is a pure analog to what’s going on around the world, including the U.S.

As I just posted on X:

It’s clear that the markets are beginning to wrestle more seriously with the consequences of debt loads that cannot realistically be paid down in sound currencies.

Ultimately, those debts will have to be managed through currency depreciation.

While the timing is unknowable, the direction is clear. And that’s why it’s apparent that this is a secular bull market in gold that will not end anytime soon.

Which that brings us to the next lesson….

Second: If this is a bull market, we need to use the volatility rather than fear it.

We’re not going to pick the precise bottom of every correction. No one does, and nor should we try.

What we can do is recognize when a powerful secular trend is giving us an opportunity to buy quality assets at lower prices.

That means taking profits when speculation becomes excessive…cleaning up the portfolio during corrections…rotating away from the companies that aren’t performing…

…And using weakness to accumulate the companies that continue to demonstrate relative strength.

In other words, corrections like this aren’t something to endure. They’re something to exploit.