Thursday, February 4th, 2010
Many people have expressed a concern that because gold and the dollar are closely correlated, the recent surge in the DXY will imminently cause a major crash in the price of gold, as gold is no longer seen as a risk haven to dollar devaluation. While that may ultimately be the case, a simple observation of gold and DXY price levels indicates that while the dollar has retraced losses stretching all the way back to August 2009, gold is merely at levels first seen in November (and again in December and January).
The preliminary conclusion is that gold has proven quite sticky at the top, even as the dollar has regained some of the investing public’s confidence. One reason for this may be gold’s slow start to the upside as the next chart demonstrates. Gold only commenced its nearly parabolic rise in September, a time when the dollar was already substantially weaker compared to its March highs: if appears it took quite a bit of time for gold investors to realize the potential ramifications associated with the dollar’s weakness, and how to hedge appropriately.
The question now arises: is gold merely sticky for the same reason it was sticky in the ~$900 range, and as a result will see a substantial and sharp drop once the trendline in the dollar continues unbroken, or are prevailing $1000+ levels the new “normal” for gold in a world in which the weakness of the fiat system is increasingly put into question, and gold is not only a safe haven to the dollar, but is seen a safe haven not by both emerging market central banks and by all investors, to allfiat exposure? Needless to say, our belief is that the latter will ultimately be proven to be the case.
And while still discussing gold, we should also note that silver is once again, at least on a relative basis, when compared to gold, looking cheap. The ratio of gold to silver prices is now back to levels last seen in August. A long silver-short gold pair trade may be an interesting option for those who, like LTCM, believe in spread compression.
And in the context of compression pair trades, another exclusive commodity pair trade that may be applicable is the long oil – short gold trade. Then again, just like in Volkswagen squee\e, the tail ends on this trade seem quite painful, which is why investors looking at this trade should have sufficient capital for margin calls so as not to be stopped out should another Brian Hunter type emerge in the gold or oil markets, or should Goldman’s prop desk (that’s right, prop) go full tilt once again.