Bloomberg Intelligence: Gold Resilient During Five-Year Dollar Rally
(Kitco News) - Gold has shown resilience over the last few years despitestrength in the U.S. dollar, according to a report from Bloomberg Intelligence.
Further, the large bearish position among futuresspeculators means potential for short covering in gold, he said. This is whentraders buy to cover bearish, or short, positions.
“Gold appears to benear an inflection point of a maximum loss of faith and a potential new bullmarket, with the foundation solidifying for an extended rally,” said MikeMcGlone, commodity strategist with Bloomberg Intelligence. “Long-dormant pricesare showing divergent strength to the dollar, volatility has reached the lowestin almost two decades and CME-traded managed-money net positions are recordshort.”
McGlone commented that gold has changed little since the endof June 23 despite strength in the dollar and S&P 500. At the beginning ofJuly 2013, spot gold was trading around $1,223 an ounce, only modestly abovethe $1,202.70 level where the metal ended last week. Meanwhile, as July 2013got under way, the spot dollar index was at 84.449, compared to 95.624 at theend of last week.
“Gold holding steady in an environment of dollar strengthand a stock-market rally indicates a bullish divergence,” McGlone said. “Elevatedmean-reversion risks for its primary adversaries are quite supportive for asustained gold rally.”
McGlone commented that gold’s “upside potential faroutweighs possible risks” based on the net-short position and “extremely low”volatility readings.
“The sharp dollar rebound halted gold's climb in April, butis less likely now,” the strategist said. ”The metal's pre-emptive recoveryabsent dollar weakness is a bottom indication. The dollar has less room torally this time.”
Further, he said, strong stocks and the lagging gold priceare “ripe for trading places.”
McGlone pointed out that gold was up 13% to Sept. 7 duringthe 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 thestock 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 mostportfolios, which is supporting the diversifier, notably via exchange-tradedfunds. Total known ETF holdings are up 47% since the first rate hike.”
McGlone added that gold prices are also historically lowcompared to crude oil, which may also hint at less scope for further goldweakness. “At 16.2 barrels of WTI [West Texas Intermediate] crude vs. an ounceof gold, the ratio has good support,” the strategist said.
McGlone also said that silver is “set to embrace aleadership role in the metals-sector rally,” with the number of ounces ofsilver it takes to buy an ounce of gold now the lowest in 23 years.
“A higher plateau in this relationship is unlikely, whilethe potential and extent of some mean reversion weighs heavily on greatershort-covering risks,” McGlone said. “A primary spark would be a pullback inthe trade-weighted broad dollar, which should be approaching the point ofdiminishing returns near 2016's peak.”
By Allen SykoraFor Kitco News
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asykora@kitco.com Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.