Gold is the best-performing asset of 2016 so far, up 16% and beating bonds and stock indexes. With gold at a one-year high, gold ETFs are attracting the most new investment, and net-long positions are the highest in a year. So is the safe haven trade is worth adding to? Or is it a temporary surge that will end up disappointing gold bulls?
By Vikram Rangala
Monday, February 29, 2016
You’ve seen and heard the advertisements telling people to put their money in gold bullion. The reasons the ads give are quaint: invest in something you can hold in your hand. Gold has been valuable since ancient times. Gold is not a fiat currency or paper valuation. (Actually, it kind of is.)
The ads often play on fears of impending economic collapse. After the Great Recession, it’s understandable that people would distrust paper assets and even real estate. So it’s also understandable that people would look further back in time for something to put their faith in. Even cash under the mattress seems risky, with all the talk radio warnings about the collapse of the US dollar.
Everyone who heeded those warnings and bought gold in the last couple months—or gold ETFs or gold futures or even some gold mining stocks—is feeling pretty good right now. They may have forgotten that just six months ago, investors big and small were dumping gold, sending it to five-year lows in December. Part of the reason for that 16% return is that gold started the year way down.
REASONS TO BE BULLISH
With the first two months of 2016 over, no other asset class has outperformed gold. Global stock indexes are mostly down, with the S&P 500 down over four percent. Even the other safe haven, US Treasuries, has struggled after the Fed’s first rate increase since 2009 failed to boost markets rattled by China and crude oil.
That great performance has some people calling gold a wise investment for the coming few years. There are some good reasons to get bullish. (However, there is no good reason to refer to it as “the yellow metal.” Why does every article on gold have to do that?). Technically, gold looks as though it might be bottoming and ready to head upwards.
There are other bullish signs. Central banks around the world, including possibly the US Fed, are proposing lower and even negative interest rates. Historically, gold prices move opposite to interest rates. Gold prices also mirror the US dollar, which some say is overpriced. And volatility is still high, which means so is uncertainty.
BULLISH, BUT WITH AN ASTERISK
On the other side are those who say that safe havens are only attractive while the market remains unsafe. Economist Barnabas Gan, whom Bloomberg called the most accurate precious-metals forecaster, last week called bullion a “superhero” that could reach $1,400. He clarified his prediction Monday, saying he only called it a superhero because it outperformed other assets year-to-date. If the Fed raises rates again later this year, he forecasts a drop of $100-200 an ounce.
With Warren Buffett’s annual letter full of bullish pronouncements about 2% growth and the strength of the US economy, not to mention continued low unemployment and other positive economic signs, it’s getting hard to make the case for an impending US or global recession.
Whatever gold’s long-term prospects, many analysts are calling it overbought in the short term, after a great run up. And that brings up an important thing for all traders to remember, especially when trading gold: know your timeframe.
DO YOU KNOW YOUR TIMEFRAME?
Markets are gatherings of traders working in different timeframes. A gold mining company, for example, may be hedging in gold futures with a long-term outlook, protecting itself from price drops. An ETF may continually acquire gold bullion, but sell off a percentage every quarter to make its returns look good to shareholders. Hedge funds and proprietary traders, by contrast, may trade in timeframes of a week, a day, or even minutes.
If gold is having a down day, a short-term trader of Nadex binary options or gold futures will short a quick drop and get out, knowing that the larger trend is up. That down day may be a non-event to a longer-term bullish trader, or an opportunity to buy cheap. It can be a fatal mistake for a short-term trader to hold on too long and get caught in a long-term move driven by buyers with a different timeframe agenda.
That’s why it’s possible right now to be either bullish or bearish about gold and still be right. It depends on how long a timeframe you plan to trade. You can’t know what gold or other markets are going to do in the future. But you can know when and for how long you are going to expose yourself to risk. That’s why Nadex binary options and spreads define the risk and timeframe before you enter the trade. Trading is about controlling the things you can control.
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