Bloomberg Intelligence: Gold Resilient During Five-Year Dollar Rally
Further, the large bearish position among futures speculators means potential for short covering in gold, he said. This is when traders buy to cover bearish, or short, positions.
“Gold appears to be near an inflection point of a maximum loss of faith and a potential new bull market, with the foundation solidifying for an extended rally,” said Mike McGlone, commodity strategist with Bloomberg Intelligence. “Long-dormant prices are showing divergent strength to the dollar, volatility has reached the lowest in almost two decades and CME-traded managed-money net positions are record short.”
McGlone commented that gold has changed little since the end of June 23 despite strength in the dollar and S&P 500. At the beginning of July 2013, spot gold was trading around $1,223 an ounce, only modestly above the $1,202.70 level where the metal ended last week. Meanwhile, as July 2013 got under way, the spot dollar index was at 84.449, compared to 95.624 at the end of last week.
“Gold holding steady in an environment of dollar strength and a stock-market rally indicates a bullish divergence,” McGlone said. “Elevated mean-reversion risks for its primary adversaries are quite supportive for a sustained gold rally.”
McGlone commented that gold’s “upside potential far outweighs possible risks” based on the net-short position and “extremely low” volatility readings.
“The sharp dollar rebound halted gold's climb in April, but is less likely now,” the strategist said. ”The metal's pre-emptive recovery absent dollar weakness is a bottom indication. The dollar has less room to rally this time.”
Further, he said, strong stocks and the lagging gold price are “ripe for trading places.”
McGlone pointed out that gold was up 13% to Sept. 7 during the current Federal Reserve tightening cycle. The metal is close to support, which he looks to hold.
“A combination of sustained strength in the dollar and the stock market is likely needed for gold to decline below good support near $1,120 an ounce a year from now,” McGlone said. “It may benefit most portfolios, which is supporting the diversifier, notably via exchange-traded funds. Total known ETF holdings are up 47% since the first rate hike.”
McGlone added that gold prices are also historically low compared to crude oil, which may also hint at less scope for further gold weakness. “At 16.2 barrels of WTI [West Texas Intermediate] crude vs. an ounce of gold, the ratio has good support,” the strategist said.
McGlone also said that silver is “set to embrace a leadership role in the metals-sector rally,” with the number of ounces of silver it takes to buy an ounce of gold now the lowest in 23 years.
“A higher plateau in this relationship is unlikely, while the potential and extent of some mean reversion weighs heavily on greater short-covering risks,” McGlone said. “A primary spark would be a pullback in the trade-weighted broad dollar, which should be approaching the point of diminishing returns near 2016's peak.”