It just keeps a goin’ and a goin.

What is happening with the increase in reported gold holdings in GLD seems to be oblivious to what is happening with the gold futures. While Comex gold is stuck in a sideways holding pattern below $1300, Western-based investors continue their attraction to GLD. Today yet another 2.68 tons were added. That is in addition to 2.4 tons added Tuesday and the 2.7 added on Monday.

(Click on image to enlarge)

Total gold holdings are now at 841.92 tons, up 199.55 tons since the start of the year and the highest level since December 2013! That is phenomenal demand. It is this demand which is counterbalancing that extremely heavy long side exposure of the hedge funds in the gold market. As long as this demand stays this strong, the hedge fund longs need have no fear. If it falters however, then and only then will that lopsided long side exposure become an issue.

As noted before, every bit of this is contingent on what happens to the US Dollar. The dovish Fed has given investors every reason to own gold as there is basically no opportunity cost in holding the metal with interest rates in the toilet.

As long as the US Dollar remains on the defensive and cannot clear the 95 level on the USDX chart, it is hard to envision a sharp break in the gold price. Something would need to occur that would alter the current sentiment in regards to the Fed and any potential rate hike for that to take place however. As noted in last evening’s post about the US Dollar – it has stabilized at these lower levels and has stopped going down but it certainly does not seem able to to anything more than oscillate below 95 for the time being. Until it does, gold would seem to be mired in a range as well. As with the Dollar, something will need to occur to shift the sentiment towards gold that currently exists.

In attempting to wrap my mind around what seems more and more inexplicable and more confusing, especially in regards to the commodity asset class in general, I keep returning to the yield curve. For many, many years, this has been my go-to indicator for economic expectations. It has always served me well.

Now, it seems dysfunctional, like so many other indicators that I have learned to trust over the years ( Dr. Copper, etc.). Look at this chart:

Over the last few days, the spread between the Ten Year Treasury and the Two Year Treasury has seriously flattened once more, giving back all of the gains it put on over the last two months.

This is going the wrong way – I simply do not know how else to say it. If economic growth is picking up and with it, demand for industrial metals and other assorted tangibles, then this spread is not showing it. If anything it is showing yet more contraction.

That is what makes this rally across the commodity sector ( in generalized terms and not individual markets ) so bizarre. You have a situation where bonds, commodities and apparently stocks are ALL MOVING HIGHER AT THE SAME TIME. None of this makes the least bit of sense to any long time market observer and yet, here it is.

This is certainly not a sign of impending hyperinflation as so many in the gold cult keep expecting. It is actually the exact opposite – more deflation. So, why would industrial metals move higher in that sort of environment? Answer – other than a knee jerk reaction by macro funds blinding buying commodities when the Dollar weakens, there is no answer.

I keep coming back to the fact that investors are so yield starved in this near-zero and negative interest rate environment, that they are plowing hot money, into anything and everything. How long this unique phenomenon continues is anyone’s guess but the more I see this yield curve refusing to confirm any shift towards economic growth or inflationary pressures, the more I become convinced that this is all going to end rather abruptly. It might well be the first sign of a shift in the attitude of the Fed towards interest rates brings the party to a rude ending. Then again, this Fed has proved time and time again, that it is the courier of the punch bowl and the enabler of the drunks.

One way or the other, we shall see. In the meantime TRADE SMALL OR NOT AT ALL.