We have detailed this comparison chart here from time to time noting the relation between the price of gold and the TIPS spread. The TIPS spread is the difference between the nominal yield of the Ten Year Treasury and the yield of the same maturity Treasury Inflation Protection Security ( TIPS).

First let’s start with the spread or the Ten Year Breakeven rate as it is often referred to:

At the risk of oversimplifying this concept, the TIPS is a bond that provides an inflation adjustment when calculating its cash flow over and above its face value or principal. Consider it a bonus that is added to compensate bond holders for inflation risk. The adjustment is based off of the CPI number.

I know this is not a textbook definition but for analysis purposes it is close enough to convey the idea that is important to investors/traders (we will leave the analysts to do their own thing as that crowd gets paid a salary and does not earn a living from the markets).

By looking at that spread one can get a sense of MARKET-BASED inflation expectations. Again, there are other factors which can come into play which make this spread an imperfect actual inflation expectation number, but it still is one of the best we have out there.

Again, here is the chart:

Of interest to me in particular is the steady rise in the spread since very late June of this year after its plunge to start off this year. When this spread rebounded higher from its February low, it managed to surpass the late November 2015 peak. That actually broke what was a clear downtrend.

Subsequent the spread once again collapsed as slow growth/deflation fears (some associated with Brexit) dominated but after it plunged in June, instead of falling to a new low, it reversed higher.

Based on what I can see of this chart pattern, the spread has now bottomed out and reversed higher. In other words, the downtrend in the TIPS spread is over and a fledgling uptrend is now in place.

It is interesting to see how the gold price moved higher late last year and very early this year as the TIPS spread collapsed lower. That was a true safe haven reaction in the metal. In late May/early June the gold price shot higher once again as the TIPS spread plunged during the entire month of June.

As the TIPS spread stabilized into July, the gold price began moving sideways. Now that the TIPS spread is moving higher, gold is moving lower.

The current sentiment is that as long as the risk of deflation/slow growth subsides in the minds of traders, the eagerness to buy gold has subsided. The way I am interpreting this is at this time traders are expecting subdued, modest economic improvement, nothing superb, nothing robust, but rather very slow progress. The thinking seems to be that Central Banks have done what they can do to stabilize the situation and now time is needed for things to heal and a growth to pick up. Thus, the urgency with which gold was being bought earlier in the year as a safe haven has waned. Call it a sort of equilibrium unlike the period at the beginning of the year in which real fears were rampant, especially in regards to China and the EU.

This is now being reflected in the Commitments of Traders report detailing open interest in the Comex gold futures market.

Look at the sharp plunge in open interest compared to its peak in late June/early July ( the same exact time the TIPS spread bottomed out and began its rebound).

I should note here that this has absolutely NOTHING TO DO WITH SOME WILD MANIPULATION claim; it has everything to do instead with a shift in sentiment among investors/traders.

At some point, after years of observing the same breathless rantings over and over again about “huge amounts of gold selling at the paper gold market ( Comex)” as if somehow it is a novel thing that sentiment constantly is changing in markets and investors/traders are adapting to that, I have reached a point of feeling a sort of sad pity for those folks who simply are holding a lie in their hand and cannot let go of it.

The art of becoming a successful investor/trader is deciphering the ever-shifting winds of sentiment that are constantly blowing through markets and positioning oneself on the correct side of those winds so that they are favorable to one’s investment goals and are carrying you forward toward reaching them; not some stubborn blind devotion to a conspiracy theory that, while it makes for great reading like some sort of suspense novel, does absolutely nothing but short-circuits any hope of actually becoming a more profitable, informed and successful investor.

You can see this shift in sentiment in the abandonment of long positions over at the Comex by the powerful hedge fund community.

Here is another look at this same group of traders showing their outright long and short positions instead of just the net position shown in the previous chart:

Not only have the hedge funds been abandoning gold in droves, there has been an increase in their appetite for the short side of the metal, albeit a small one at this time.

Here is an overall look at the positioning of all the players:

It is noteworthy that the general public, the small specs, are not far off from a 3 1/2 year high in net long positions in gold. Considering the breakdown of the technicals on the price chart, that is rather ominous.

As you can see from this weekly chart ( intermediate term ), the breakdown out of the sideways trading range to start the first week of October soured the picture dramatically. Technical indicators remain in bearish postures as a result. With all those weak-handed longs losing money ( the small specs), there is the risk of further margin-related selling if this market cracks yet another downside chart support level.

One such level is near $1230 -$1225. A fall below that level will result in another round of long liquidation that should pressure the market down to the $1205 level and perhaps even the psychologically important $1200 level.

For the bulls to have any hope of improving the near term sour prospects, they need to take the price back up into that box on the chart. That means a recovery back to over the $1300 price level.

The gold shares are signaling no immediate improvement in the gold price is on the horizon at this point.

The index remains solidly below its 200 day moving average with the 50-day moving lower and the 100-day also having topped out and now beginning to decline as well. In short, there is nothing on the chart that says to buy anything in this sector at this time.

The only bright spot that I can see on this particular chart is that the price is managing to remain above the 50% Fibonacci retracement level of the entire year’s rally near the 192 level. Heaven help this sector if that level goes!

Bulls are managing to provide some stability in here for the moment but they will need to get this thing back above the 200 day for starters and above 220 to have any hope of turning it around before the year ends. That GAP down below support near 220 to kick off this month was devastating as it marked yet another strong downside gap lower to go with the one in August.

The HUI/Gold ratio has easily melted down below its May lows and is struggling to even mount an attempt to climb back above that level.

As far as gold goes in general, the bulls at least have some solace in the fact that the gold ETF, GLD, has held rock steady during this entire debacle in the shares and the futures.

I am unclear as to why this development is occurring against the backdrop of rising interest rates, a rising Dollar, a rising TIPS spread, falling gold prices and falling gold mining shares, but suffice it to say that they are some rather large investors who are not being influenced by these other developments and are hanging onto their gold holdings at this particular ETF. There are other factors that are influencing them at this time. That is helping to keep the gold picture from becoming completely one-sided. Gold bulls need these few large owners of GLD to stay the course if the metal is to avoid another sharp plunge. I am keeping a very close watch however on GLD; if it starts to experience any sort of fall off in reported gold holdings, things are going to get a lot worse for gold bulls before they get better.

One last note – different but related somewhat… here is a chart of First Majestic Silver “AG” which I view as a bellwether stock for the price of silver.

Nothing doing….

At least the rate of its freefall has slowed somewhat! Look at how far below its 200-day moving average it is. It is showing a bit of stability here between $8.00-$7.60 but it needs to do a lot more to turn the tide. If not, it is not a wild stretch of the imagination to see this thing at $7.00.

This has not been lost on silver specs.

I have said it a thousand times before and will say so again – silver always has been, and always will remain, nothing but the plaything of the hedge funds. It is a heartbreaker and an account destroyer. I cannot tell you how many people I have known over the years whose trading accounts have been destroyed by this thing. Let me give a bit of advice; if you are going to trade this goofy metal, keep a very short term perspective on it and ABOVE ALL, do not load the boat on either short or long positions. It will ruin your trading career faster than you can blink. If you must own the metal, buy the physical stuff and leave the paper market to the funds to play with.

Take this from someone who has been at this profession a long, long time.