We all know gold has been one of the biggest losers for investors in 2013, and if you’ve been long gold for the past three months, then you know what the pain of a near-20% decline feels like. Now, while many people have correctly cited the Fed’s pending move to “taper” its bond buying program as the chief reason for the shine coming off of gold, there is another reason why gold has become anathema to the bulls—and that reason is the Indian rupee.
The Indian rupee has been in freefall for months and the weakness in the rupee means it costs more for Indians to purchase gold. The demand for physical gold from the Indian consumer is something that, in the past, has kept the price of gold going higher. So, if there were to be a cessation of the rupee’s decline, then logic dictates that this would act as a bid higher for gold.
Well, this is precisely what happened in Tuesday trade, as gold rallied about 1% due in part to some potentially positive developments with the rupee. On Tuesday, the Indian government took steps to stabilize its currency. The first step was to ban banks from so-called “prop trading,” which means trading with the banks’ own money and not the customers’ domestic currencies and currency futures. The second step was to effectively double the margin requirements on Dollar/Rupee forward contracts.
Click to Enlarge If successful, these measures will stabilize the rupee, and that will be bullish for gold.
As traders, we can use this still relatively little-known fact as a catalyst to get long beaten-up gold shares, and as traders the best way to do that is via the SPDR Gold Trust (GLD), an ETF pegged to the spot price of gold bullion.
After all of the pain in the space of late, investors should be rightly wary of a position in gold. However, when trading, as with so many things in life, it’s the early and the intrepid that are rewarded the most.
If this describes your trading style, then I suggest taking a small position in GLD, which could see a 10% pop over the next several months. Of course, gold also is a very risky proposition, so make sure you set a tight stop-loss of around 5% below your buy price to ensure you don’t get caught in a downdraft.
At the time of publication, Jim Woods was long physical gold. He does not, however, have a position in GLD.