RMG Wealth’s Stewart Richardson sees opportunity to buy gold

Stewart Richardson, chief investment officer at RMG Wealth, sees evidence that gold prices could be set to rally.

The price of gold has fallen from the all time high of US$1,921 in September 2011 to low of US$1,180 this past week, a fall of nearly 40%. Year to date, gold had fallen by 30% at the low point, a quite spectacular fall for what was once the darling of the investment community. What went wrong?

Back in early January, Mario Draghi spoke of positive contagion (did he really say that and will any journalist ever ask him for any evidence to back this up?) and this not only boosted the euro but encouraged the further unwinding of safe haven trades such as long gold and long Swiss francs. With the bull market in risk assets energised, encouraged by central banks, investors went on a massive hunt for yield and jettisoned anything without yield (eg, gold and Swiss Francs). In recent weeks, inflation expectations as measured by 10 year US breakeven rates have collapsed, which is a very hostile environment for assets that traditionally benefit from higher inflation.

Then in April, the price of gold collapsed with the cause being attributed to a combination of negative recommendations from big banks as well as the gold bugs claiming a large amount of market manipulation. This collapse clearly caused a great deal of pain to those investors holding gold and it would appear that the liquidation of those holdings continues until the present time – including commodity funds that we suspect are being hit by a wave of investor redemptions.It is this type of forced liquidation that can provide opportunities.

The 30% fall in gold this year must have cleared out a very large number of holders who either joined the party late and/or could only be described as loose holders. Ironically, the period post the launch of QE infinity from the Fed saw many commentators proclaiming gold to be a perfect hedge against a coming inflation. The Fed launched open ended quantitative easing on 14th September and gold peaked a few weeks later on 5th October. Almost a classic case of investors buying the hype, only to regret it later.

So, that’s the recent past. What of the future? Well, nothing moves in a straight line, and we get the feeling that gold is getting ready to bounce. Firstly, the bullish sentiment towards gold has collapsed to a record low as measured by the 10 day average of the bullish sentiment measure of small traders. This is no guarantee that prices must bounce, but with virtually no bulls around who is there left to turn bearish (and sell)?

 

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