As an update to investors this week, Sentry Investments’ Jon Case (recent interview) and Keith MacLean issued a new piece entitled, Gold and Goldilocks.”

For reference, Sentry manages over $10 billion in assets, with over $1 billion dedicated to precious metals and natural resource funds.

In this new market update, Case and MacLean noted that despite the vicious drop in the price of gold, the monetary conditions that have historically ‘pulled gold upwards’ are still in place and growing. The duo noted that,

“Total expected global-money-creation QE is roughly $2 trillion. This 14% pro forma full taper increase is shown in [the chart below], together with the historical correlation to the gold price. (note: this one-year sum of money printing equals 30% of the $6.8 trillion value of all the gold in the world — about 176,000 tonnes priced at $1,200 per ounce.)

Chart: Upward pull of global money creation on gold to continue

(click to enlarge)

Case and MacLean further spoke to the dominant role and precarious state to which the paper gold shorts have played and put themselves, in that,

“Exhibit 5 highlights inventory changes since ETF gold holdings peaked late last year. Of the 34.3-million-ounce liquidation, 58% came from the ETF products, 13% from selling long COMEX gold positions and 29% from COMEX short sales. Another way to look at it is that 70% of the recent COMEX selling pressure is from short sellers of paper gold.”

(click to enlarge)

“Should the buyers of these paper gold short positions wish to take possession of the gold, they can demand it.”

Case and MacLean also affirmed the growing ‘West to East’ gold migration, in that,

“Such a trend has clearly developed…indicating an unusually high demand for physical gold delivery despite price weakness. That being said, it is possible that some of the decline in registered stocks may be the result of dealers buying paper gold at a discount to spot in North America, taking delivery and then selling the gold at a premium in Shanghai.”

As a final big-picture comment on the gold market, Case and MacLean concluded by saying,

“[W]e believe the recent precipitous fall in the price of gold is the result of an overreaction to the Fed’s musings on the beginning of QE tapering…Moreover, gold has dipped meaningfully into the global all-in cost curve and has already triggered mine-production shutdowns, suggesting the market should be approaching a floor-price for gold…[and] ultimately, we believe that global money creation continues to exert a strong upward pull on gold’s intrinsic value.”

Bottom Line: While western markets believe the fires of inflation have been extinguished by a slowing global economy, central bankers globally are piling higher monetary kindling. Eastern investors are scrambling at the opportunity to purchase gold at these levels, and western investors will no doubt jump on board after a few-hundred dollar move (or more) higher in price.

To read Jon Case & Keith MacLean’s excellent Gold and Goldilocks piece in it’s entirety, visit: Sentry Investments

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Tekoa Da Silva
Bull Market Thinking