It’s been another very solid week for precious metal investors, with the AUD price of gold closing in on $1600oz. In USD terms, the price has now rallied 4% for the week, and is comfortably back above $1150oz

Year to date this means that the price of AUD gold is up $150oz, or approximately 10%, which is about the annual average return for the precious metal in the last 15 years.

Just how good (though not spectacular) a return that is comes to light even more when we consider that the local stock market is now in the red for the year, frustrating investors who have felt ‘forced’ into it as a result of the 50bps of interest rate cuts the RBA has inflicted on them.

As for what has caused the rally this week, we see three primary forces at play which are responsible for the move in gold. Not only are we seeing some serious volatility in the equity market, with the S&P off sharply overnight, but we’ve also see the USD weaken in the past 48 hours, with expectations of a rate hike in September falling. We discuss both of those in more detail later in this piece. Finally, we’ve seen some short covering in the market, which was not unexpected considering how stretched it had become.

The gold rally over the last week is also no major surprise when you consider what the charts were looking like in early August. Gold was bouncing around the USD $1,080oz mark, and most market commentators and mainstream media (Bloomberg, CNBC, etc) we’re producing ever more bearish headlines and ‘analysis’, predicting prices to go lower.

We at ABC Bullion did blog about the sell-off and the expected rebound in price, which you can find here:

Sentiment towards gold was about as bad as it gets and hedge funds were net short for the first time ever. Irrespective of the asset class, that is fertile ground for a contrarian investor. As such, this latest price movement may well mark the first upswing from THE gold bottom. But we can’t be sure yet, and this rally would have to move past USD $1,200oz at least to have more conviction in that analysis.

On the chart below we’ve circled the buy signals on both the RSI and MACD indicators. Gold was short term oversold, so a rally was expected. Gold has also rallied through the $1,130 level that it fell through in July, so naturally there would have been some short covering above that level too, which would contribute to the rally towards $1,150.

How long this latest gold rally lasts is still an unknown, but two defining factors will be next move for the USD, and the US stock market.

Starting with the currency, and pretty much the whole market is convinced that the USD will continue to strengthen in the months and years ahead. That almost complete conviction in the future strength of the dollar is one of the reasons gold has struggled at times this year, but we see that faith in the USD being tested in the coming months and years, with the Fed almost definitely throwing in the towel on the idea of a September rate hike.

As a result, the US Dollar index has dropped from 97 to 95.50 in the last 48 hours, adding another element to the gold rally.

Turning to the stock market and whilst we saw another impressive rally for gold overnight, US stocks plummeted 2%. Indeed the sell off in the S&P 500 is starting to get a little ugly, which will worry many analysts considering its all happening in the most accommodative monetary policy environment in recorded history.

As you can see on the chart below, the S&P500 is now testing its 4-year uptrend line, and it will make the whole market nervous if this line doesn’t hold.

If the weakness in the US stock market continues, then that will bolster the gold rally and give it more legs. If we see US stocks rebound rapidly from this level I think it will help limit the rally in gold.

Time will tell, but it is our long stated opinion that a great rotation out of overvalued global equity markets (and fixed income for that matter) will occur in the coming years, with a flight to safe haven assets, such as gold and silver almost inevitable.

The smart money should be positioning for this move now.

Druckenmiller goes long Gold!

Speaking of smart money, Stanley Druckenmiller is a hedge fund billionaire, who runs Duquesne Capital. In the past, he once worked with George Soros back in the days when Soros was famous for ‘breaking the bank of England’. Duquesne, which at one point had approximately $12 billion in assets under management, was actually closed in 2010 as Druckenmiller didn’t feel he could continue to deliver the high returns his clients had come to expect in a world of ZIRP and QE.

Since then, he has run Duquesne as a family office, and this week it was revealed that he has recently made a $300 million bet on gold, making it the largest long position in the portfolio.

That is big news

In taking this position, Druckenmiller joins other high net worth legendary fund managers like Ray Dalio of Bridgewater and Jean Marie Eveillard of First Eagle Funds, who also have healthy allocations in their portfolios.

Dalio recently quipped that there is no good reason not to own gold, and that only those ignorant of both economics and history continue to overlook physical bullion as a core asset to own in their portfolio.

Eveillard, whose First Eagle Global fund more or less quadrupled the performance of the MSCI World between the early 1980s and today, is also a believer in the role gold can play in a portfolio, famously telling Wealth Track host Consuelo Mack that the one asset everyone should own is gold bullion. Eveillard also stated that he had more than 15% of his portfolio (which would be sizeable) in the precious metal.

Talking SMSF and Physical Gold

This week I’ve had the distinct pleasure of talking about the role physical bullion can play in a SMSF portfolio, travelling around NSW to talk at 4 SMSF Association State Chapter events in NSW.

In these talks, we looked at the primary reason for including gold in a SMSF portfolio, which is of course wealth protection, though we also touched on the possibility of making a huge sum of money when the inevitable rotation out of financial assets into hard assets occur.

We also included a case study on why physical bullion is the superior form of bullion ownership, building on the research we published in our new SMSF Trustees and Physical Bullion – 2015 Edition.

It was a great experience doing those talks, and there was very keen interest from attendees who were eager to understand the dymanics of how the physical gold market really works, and how gold as an investment can fit into a SMSF portfolio as part of a well diversified fund. It is a great sign as we are certain it will eventually lead into more physical gold demand and higher prices for the precious metals.

Until next week

Disclaimer

This publication is for education purposes only and should not be considered either general of personal advice. It does not consider any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (expressed or implied) or other information contained in this report should be acted upon without the appropriateness of that information having regard to those factors. You should assess whether or not the information contained herein is appropriate to your individual financial circumstances and goals before making an investment decision, or seek the help the of a licensed financial adviser. Performance is historical, performance may vary, past performance is not necessarily indicative of future performance. Any prices, quotes or statistics included have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness.