Editor’s Note: Today’s Bloomberg report of price fixing at the highest levels in gold is leading calls for an investigation into the precious metal’s trading. The study notwithstanding, gold’s recent positive moves in 2014 have caught the attention of many strategists, including frequent Breakout guest and head of ETF trading and strategy at Stifel Nicolaus, David Lutz. The following is a guest post from Lutz on where he sees the gold trade heading next.
The most hated asset class in 2013 has become one of 2014’s darlings: gold. Since the start of the year, gold has outperformed the S&P 500 (^GSPC) by 10%, and is finally showing a technical breakout by getting upside of the 200dma (200-day moving average), a first in a year. Given gold is used as a “inflationary hedge,” many market watchers have been shocked by the rally, as deflation, not inflation, seems to be in the headlines globally. Gold could easily regain the $1600/oz level in 2014, a level it has not seen since the dreaded “taper” word crushed the commodity last year.
There are several factors that are poised to push gold higher. First, due to those deflationary concerns – we have the G20 embracing growth in 2014, not austerity. Basically, both the European Central Bank and the Bank of Japan have been given the “green light” to ramp up money printing to spark growth. The more money is printed globally – the more valuable a hard asset like gold becomes.
Second, we are seeing liquidation from ETFs like the SPDR Gold Trust (GLD) subsiding after shedding over 40% of their gold holdings in 2014. We are on pace for February to be the first month where ETFs were net buyers in over a year – a big factor in the market. Third, the world’s largest buyers are ramping purchases: India is gearing to remove tariffs that have restricted gold consumption. Indian gold imports have started increasing again, rising to 38 tons in January, from a low of 3 tons in August. Also China’s purchases of the metal have propelled them to being the world’s largest consumer as China's demand for gold just reached its highest level in nine months.
Finally, one of the biggest factors may involve positioning. Professional traders love to data-mine the CFTC’s “Commitment of Trader” reports for futures positioning. At the end of December, speculators were the most bearish they have been on gold in 10 years. One of the golden rules of Wall Street comes into play here: “the crowd is rarely right.” The “pain trade” for gold was for the metal to rally, as so many were positioned the wrong way – that’s a big tailwind as these positions unwind.
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