Advisory Letter: 13th November, 2019
Good day from Kristal Advisors!
Quick observation to share on the price action in Gold over the past 4 days: 7th November we noted a massive spike in volume on the break below 1480. This same spike has occurred at similar times of the day on Monday and yesterday, pointing towards algo-driven liquidations. The net long speculator position in the CME Gold futures is now back to lows last seen in June this year. This can sometimes be an actually positive signal, as a crowded position gets cleared out, and momentum in the opposite direction will be able to build up again once the short term order flow is cleared.
The next steps forward depend on your investment horizon: While the change in tone in the US/China trade war as well as the correction higher in long term yields have caused a sharp correction lower in Gold prices over the past 2 weeks, our long term positive outlook is still positive on Gold.
Long term has to be seen in the context of 2-3 years ahead. I personally was never a big fan of Gold, does not provide any yield, and as a store of value it is just about tracking inflation.
But that is exactly the point this time round. Gold saw it’s golden era (pun intended) back in 2009-2011 era, when the common expectation was that QE will have an inflationary impact. It is not too far fetched to assume that we are at the beginning of a similar trend and potential change in narrative. With most of global debt and safe assets trading near or below 0%, the appeal of Gold is likely to increase. We also think that monetary policy has a diminishing positive effect at these levels, and measures from the textbook of modern monetary theory like debt forgiveness and further deficit spending, will have an inflationary impact.
Gold has to be seen therefore as a sort of insurance policy in a portfolio that has at least no time decay. The all weather principle of a dynamic portfolio with allocations towards fixed income, equity and commodities (including Gold) tracking economic indicators and with the objective of providing a long term return in excess of GDP growth, puts an optimal allocation to gold in the 8-12% area.
Our All Weather – Un-leveraged Kristal contains an allocation to Gold in that range mentioned above and allows the investor to have a broad index portfolio consisting of US Treasuries, Broad Equity index ETF and Gold. For individual exposures, investors can also choose the State Street Gold ETF as an addition to the portfolio.
I see this pull back in Gold towards the 1400-1450 area as a good long-term buy opportunity to add to this insurance policy in a portfolio, but a break below the 200day moving average and the support around the 1375 area established from previous highs, would force us to revisit this call.
The materials and data contained herein are for information only and shall in no event be construed as an offer to purchase or sell or the solicitation of an offer to purchase or sell any securities in any jurisdiction. Kristal Advisors does not make any representation, undertaking, warranty or guarantee as to the update, completeness, correctness, reliability or accuracy of the materials and data herein. All opinions, forecasts or estimation expressed herein are subject to change without prior notice. Kristal Advisors and its affiliates accept no liability or responsibility whatsoever for any direct or consequential loss and/or damages arising out of or in relation to any use of opinions, forecasts, materials and data contained herein or otherwise arising in connection therewith.