Tectonic Metals gets funding for gold exploration in Alaska
The company's Flat gold project is located 40 km north of the giant Donlin gold project.
By Ananthan Thangavel, Contributor
While much has been discussed about the possible effects of the end of quantitative easing, the market’s response so far has been incredibly unclear. In our opinion, markets have become schizophrenic, in that each market is having a different and contrary response to the end of QE2.
On the surface, the forex market is not only not pricing in the end of QE2, it is actually fully pricing in a QE3. The US dollar continues to suffer against the euro and the yen, even with huge structural problems in both of those economies. Forex investors have essentially priced in perpetual Armageddon/money-printing for the US dollar, as they expect Bernanke to continue to pump in liquidity forever, and never raise rates. While it is a long-term view, we believe that a long position in the US dollar against the euro and yen are highly attractive positions due to the extreme pessimism regarding the dollar and lackadaisical view surrounding interest rates.
Currently, a vast majority of the market believes that US interest rates will not be raised for more than a year from now. If the Fed does surprise and raise rates before then (which we believe will happen), the US dollar will roar back against the euro, and especially against the yen. As carry trades shorting the dollar are unwound and replaced using the yen, the dollar could easily gain 10-20% against the yen.
While forex markets are pricing in a perpetual quantitative easing, somehow commodity and precious metals markets are pricing in monetary tightening. With gold down over 3% over the last 2 months, and silver down over 30%, precious metals investors seem to be believing in monetary tightening and US dollar strengthening, while forex investors are betting on the exact opposite. For gold to be down 2.2% in June but the euro up .74% makes no sense.
While we believe that, in the long run, gold will become decoupled from any one currency, for gold to go down while the US dollar depreciates is not a rational market move. We continue to believe that gold can and will rise with a rising US dollar, but it appears that the market will take some time to price this in.
With US stocks and forex pricing in perpetual easy monetary policy, while precious metals markets and government bonds price in the certain end of quantitative easing, someone has to be wrong. We believe that the extremity of both parties’ views and willingness to overextend prices has rendered both of them wrong. While we believe US stocks are probably somewhat undervalued, we do not view their performance as compelling over the medium term. However, with inflation ramping up and real interest rates becoming even more negative, precious metals seem to be the best-positioned asset for the next few years.
Gold
To enter certain beat-dead-horse territory, we continue to like gold more and more as it falls in price. The following chart shows the price of gold in yellow and Managed Money net longs in white.
The recent $65/ounce price fall as of late looks to be caused by Managed Money long liquidation, coupled with disproportionate retail selling. The following charts show gold futures with volume, and then GLD (GLD) with volume.
As can be seen, gold futures volume was slightly below average recently on the sell-off, whereas GLD volume was above average. Especially given the light volume surrounding the holiday weekend, GLD’s increased volume is telling that retail investors are bailing out of gold much quicker than futures traders. As usual, we do not expect the short-term retail response to be correct, and we view the purchase of gold futures as ideal.
The following chart shows a daily price of gold over the last 5 years with the 150 day moving average.
As can be seen, gold has not dipped below the 150 day moving average since early 2009 in the depths of the financial crisis. With the 150 day moving average rising each day, the 1440-1450 area should be considered a hard floor for gold prices. If we see gold trade down to the 1400-1430 level, we would become more concerned over the long-term trend for prices. Risk-minded traders could use this level for a stop loss, although almost every gold trader will also have their stops in this area, so we could see a quick free-fall down to the 1300-1350 range if in fact the 150 day moving average is violated. However, we view this scenario as highly unlikely.
Trade Recommendation
We recommend the purchase of gold futures at current prices, $1485 (at the time of writing) or better. While this has been a tough trade over the last couple weeks, we believe more than ever that gold is a great asset to own over the next 1-2 years. The same trade could be effected by purchasing GLD.
Disclosure: I am long GLD and gold futures
Disclaimer: All information included herein is the opinion of the firm and should not be considered investment advice. Past performance is not necessarily indicative of future results.
