All that glitters may be gold
Posted on: 11 February 2019 , by: Darren Sinden , category: Market Review
While all eyes in the investment world have been on the incredible rebound in US equity prices or the day-to-day oscillation of the pound, few are paying attention to the stealth rally in gold. The yellow metal is up about 15.9% since November of last year in a near vertical rally as it approaches multi-year highs in what could be a major breakout to the upside.
There are several reasons why gold has found a bid, not the least of which is the collapse of crypto. It’s been a little more than a year since the great flameout of Bitcoin and other crypto assets that saw some coins losing 99% of their value. While Bitcoin has managed to find some support at the 3000 USD level, its reputation as “digital gold” has been damaged perhaps beyond repair. Investors who flocked to crypto in hopes of creating a new asset class that would serve as a repository of safety have been sorely disappointed by instances of fraud, theft and sheer incompetence as exchanges lost their keys rendering the investment worthless. Against that backdrop of malfeasance and incompetence in crypto, the sheer old school appeal of gold which has served as a safe harbor investment for 5,000 years, has started to resonate with investors once again.
Another reason why gold is looking better by the day is the sharp decline in real interest rates over the past three months. Since gold offers no yield, it tends to suffer when real inflation-adjusted bond yields rise. Conversely, it looks more and more attractive to investors when real yields are declining or remain low. Since November of 2018, the yield of on the benchmark 10- year US bond has collapsed by 65 basis points as G-11 central banks led by the Fed completed retrenched from their policy of normalisation. Spooked by the violent financial markets in December and the growing global slowdown caused by US-China trade tensions, the G-11 central banks are all firmly in neutral territory with some even hinting at the prospect of rate cuts. While the worst of the cold war in trade may be over with prospects for US-China rapprochement looking more likely, it’s far from clear if global growth will rebound anytime soon. In Europe, in particular, the populist stress coming from Italy which is now in recession is adding downward pressure to rates with German 10-year trading at a measly 10 basis points.
At present, the yellow metal is woefully under-owned with portfolio managers across the world allocating just 2% of their assets to the metal. This stands in sharp contrast to the historically recommended average of 5%. Even on a short-term speculative basis, the bullish sentiment toward gold is nowhere near levels of euphoria. In fact, net speculative longs according to the latest Commitment of Traders report data shows longs are actually smaller than the last time when the yellow metal was at these similar price levels. The positioning suggests that the rally in gold could have more room to run.
Technically gold is now approaching a multi-year trendline around the 1360 USD level and appears to be consolidating a massive multi-year base. The rule of technical analysis is - the longer the base, the stronger the breakout. If gold can break through the 1400 USD level and close there on a monthly basis that would signal a much bigger move to retest the record highs near the 1900 USD level. Given the current price action, the market appears to be anticipating just such a scenario as 2019 progresses.
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