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One Bank’s Advice: ‘Stay Long Gold’

Gold's recent rally has of course reignited the eternal debate about the relative merits of owning largely useless pieces of metal as a "hedge" against the end times. But perhaps more important than the debate about whether it makes sense to own something that can't be eaten or burned as protection against a scenario that leaves us all living in Cormac McCarthy's The Road, is the question of where real rates are headed...

As you’re undoubtedly aware, gold hit a fresh one-year high overnight on Friday as the dollar plunge accelerated.

Gold has of course benefited from haven flows tied to North Korea and also from the perception that the risks emanating from Washington aren’t set to abate any time soon, the recent exercise in fiscal can-kicking not withstanding.

Gold

Gold’s recent rally has of course reignited the eternal debate about the relative merits of owning largely useless pieces of metal as a “hedge” against the end times. But perhaps more important than the debate about whether it makes sense to own something that can’t be eaten or burned as protection against a scenario that leaves us all living in Cormac McCarthy’s The Road, is the question of where real rates are headed.

Gold is still just an inverse real yield play,” Bloomberg’s Mark Cudmore wrote last week, adding that “since most major central banks — such as the Fed and the ECB — are more likely to hike rather than cut rates as their next move, despite a lack of sustained inflation, it’s unlikely the next major move in real yields is going to be lower.”

And then there’s the liquidity issue or, more simply, the problem that comes with saying you own gold when you really only own paper that’s supposed to represent gold. As Goldman put it in a recent note, “one lesson [investors have] learned is that if gold liquidity dries up along with the broader market’s, so does your hedge—unless it is physical gold in a vault, the true ‘hedge of last resort.'”

Finally, there’s the very straightforward contention that gold is simply overbought at current levels.

Whatever the case, folks are trading – by God. “Volume on the Comex in New York hit a record in August as North Korean tensions and a weaker dollar boosted demand for the metal,” Bloomberg noted in a short piece dated Friday, adding that “some 6.55 million contracts — worth almost $900 billion now — changed hands last month, more than when Donald Trump was elected U.S. president or during substantial price spikes and slumps.” Here’s the chart:

GoldBBG

Well, BofAML is out weighing in on all of this and it’s probably worth highlighting a few key points from their latest on the subject.

First of all, the bank says positioning isn’t stretched enough to warrant the derisive “contrarian indicator” label. To wit:

Given the somewhat mixed demand backdrop on the physical market, most of the rally was driven by non-commercial market participants, which is not unusual. To that point, Chart 4 shows that assets under management at physical backed exchange traded funds have risen in recent weeks. Similarly, Chart 5 highlights that non-commercial futures positions on CME have risen. At the same time, we note that positioning remains well below a z-score of +2, a level that is a contrarian indicator.

BoFAGOLD

Next, BofA notes that although the GFSI isn’t indicating panic just yet, there are signs that investors are looking to hedge:

Starting with cross-asset volatility, Chart 6 shows that BofAML’s Global Financial Stress Indicator remains within recent ranges, suggesting that investors and traders are comfortable with the current status quo on the markets. Having said that, Chart 7 highlights that some uncertainty has been creeping in, with the Skew sub-index sharply higher of late, suggesting that purchasing protection against downside has become more popular.

BOFAGold2

Lastly, here’s what they have to say on the real rates argument:

US real rates have lost ground again… Changing tack and looking into the fixed income space, gold prices tend to be inversely correlated with US real rates (Chart 9). This is important because US real rates have given back most of the gains seen around the US presidential elections in 2016. Acknowledging that inflation and inflation expectations remain subdued, this was heavily influenced by a decline of nominal rates. The repricing in rates is also picked up by Chart 10, which shows that the US yield curve has been flattening.

BofAGold3

Without a reason to think they’ll be a marked change in the way Washington does business, it’s hard to see how that’s going to reverse course – especially in light of the figurative and literal head”winds” from Harvey and Irma.

The bottom line: “Putting it all together, we see a high likelihood that the current macro-economic backdrop will persist and push gold towards our $1,400/oz price target.”

Position accordingly. Or else bet that the dollar will rally or eventually, a weaker dollar will drive up inflation.

Up to you.

 

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3 comments on “One Bank’s Advice: ‘Stay Long Gold’

  1. Sommer Anthony

    I start to wonder, whether there is kind of great reckoning. Crypto-Currencies in recent past gained supporters in the multithousands. Ease of trade, limited supply by mathematical limitations and physical limitations (energy to spend for mining new crypto-coins) surely are seen as merits by a new generation, saddened by claims of their dad or granddad claiming, only gold is a non fiat currency “in the end”. With North Korea building an H-bomb it may be, some crypto-currency owners get second thoughts. Should they or any other insane dictator be capable to let such an H bomb (or two) explode in high altitude, cryptocurrencies might be gone momentarily, as the electric grid will be destroyed and any survivor down on earth is finding him(her)self in stone age ? Only the coins (Eagles) at home may buy some bread (if any). Of course this nightmare may not happen. But it reminds “investors” in Cryptos, that physical ownership of gold remains a wealth of last resort shld the unthinkable happen for whatever reason. With the desire of DT to extinct debt limits you may find an additional reason to mistrust in the currency the politicians are eager to control. To me GOLD is not so much an indicator how to protect against inflation (dad cat), but an indicator of how much trust investors put in the capabilitiy of reigning forces to continue in the way that lead us to current calamities.

  2. Curt A Tyner

    Why would Morgan Stanley purchase 650 MILLION OZ’S of silver over the last few years? They must have a bigly door to stop. H-you always use a doomsday scenario when trashing people trying to hedge their bets with PM’s on an uncertain future. Some gold and silver stocks are as good a play right now as almost any investment moving forward. China and Russia have entered into an agreement to buy oil with gold backing the yuan. This is big for the future of the dollar and for gold and silver. The East (China, India, Russia Turkey and many more) have accumulated vast amounts of gold and silver while the west has not. Why? They want out of the dollar that’s why. The full faith and credit (20+ trillion $$$ of Debt) of the United States. Can’t understand why they want out? HUM……… https://asia.nikkei.com/Markets/Commodities/China-sees-new-world-order-with-oil-benchmark-backed-by-gold

  3. If gold bothers anyone invest in silver..By the time Trump is thru injecting this economy with the kind of money he loves (other people’s..or in the Fed’s case nobodys) silver will decimate the gold:silver ratio and make new all time highs. Cryptocurrencies, at the end of the day, can only exist where governments let them (seen China lately??)…

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