If an asset rallies despite bearish news, it's a very bullish sign.  If it drops on bullish news, it's generally a bearish sign.  

The argument is that if it behaves contrary to publicly available news, either that news has already been discounted (buy the rumor, sell the news) or that smart money knows something that the public doesn't.

 

Arguably, the bearish scenario has just happened in gold.

 

Last night, it was announced that President Obama and the Republicans struck a deal -- to extend all the Bush tax cuts (what the Republicans want) in exchange for extending the unemployment insurance benefits (what the Democrats want) -- that will increase the U.S. budget deficit by hundreds of billions of dollars over the next two years.

 

Stan Collender of Qorvis Communications told CNN that Obama's deal will add as much as $900 billion to the national debt, eclipsing even the size of the 2009 stimulus package.

 

Isn't this good news for gold, which rallies on concerns about the U.S. budget deficit?

 

Gold reacted predictably at first, rallying to hit a record-high above $1,432 per ounce.  However, it then reversed the gains and settled at a loss for the day at $1,432 per ounce.

 

Incidentally, rallying on good news in the beginning of a session but then declining and closing down for the day is another bearish sign.  

 

There are, of course, reasonable explanations for this.  Perhaps, like the White House said, the plan will not worsen the medium- and long-term deficit but only help the economy in the short-term. 

 

If this is really the case, gold should predictably drop. 

 

However, it's also possible that some savvy smart money investors were looking for an opportunity to unwind their long gold positions without too much slippage.  The best time to do so,  of course, is on the heels bullish news that draw bids from rally-chasing latecomers. 

 

Email Hao Li at hao.li@ibtimes.com