Big shifts are underway in the financial markets.
For much of the start of the year stocks and commodities were supported by a falling U.S. dollar as leveraged hedge fund types engaged in what was called the “dollar carry trade” — borrowing cheaply in greenbacks and using the proceeds to buy foreign stocks, silver, and crude oil.
But the dollar has been boosted by the death of bin Laden and disappointing economic data, forcing many to close their carry trade positions. (I discussed this in my last blog post here.)
Now, gold has uncoupled from the dollar and strengthened as investors scramble for a safe haven asset. The yellow metal began to trade according to its still very attractive long-term supply-demand dynamics, aided by a slowing economy, Europe’s troubles, and the U.S. Treasury nearing a technical default.
Analysts at RBC recently outlined a number of big reasons why gold should trade as high as $1,600 this year. A few of these are listed below, with excerpts from the RBC research note:
The euro zone debt issues
“Increased risk in the Euro Zone would likely drive investors into traditional safe haven assets such as gold and US treasuries, in our view. This may create a situation where gold rallies with the US dollar like we saw during 2005, and from the fourth quarter of 2008 to the first quarter of 2009, and the first quarter of 2010 to the second quarter of 2010. Gold and Gold Equities have performed well during and following these periods.”
Central bank buying
“Central banks became net buyers in 2010 for the first time since 1988 as sales by western central banks have slowed and emerging markets central banks increase gold holding to diversify reserves away from US dollars.”
Strong speculative interest
“The COMEX speculative net-long position remains elevated at 24.0MMoz (as of May 6, 2011), although it is still below its record high of 30.8MMoz reached in December, 2009. ETF demand also remains strong at 58.7MMoz and total holdings do not tend to drop during gold price corrections.”
There are a number of attractive exchange-traded funds (ETFs) plays in the sector. I mentioned the leveraged ProShares UltraGold (NYSE: UGL) in my last post — which is focused on gold futures. That still looks attractive at current levels.
A strong case can be made for gold mining stocks, however. They were hit harder over the last few months compared to physical gold — with the Market Vector Gold Miners (NYSE: GDX) falling to its January lows for a peak-to-trough decline of nearly 17% while physical gold fell 7%.
That performance gap seems to be closing now — setting the stage for a period of relative out performance by the GDX, which holds mining stocks including Goldcorp (NYSE: GG), Newmont Mining (NYSE: NEM), and Barrick Gold (NYSE: ABX).
The smaller, sprightlier Market Vector Junior Gold Miners (NYSE: GDXJ), which holds stocks like Hecla Mining (NYSE: HL) and Allied Nevada Gold (AMEX: ANV), also looks very attractive. Smaller miners tend to be more sensitive to sector movements, so the GDXJ should move faster to the upside.
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The author can be contacted at anthony@edgeletter.com. Feel free to comment below.
