Commodities | Sep 26 2013
If you told the market in Sept 2010 that stimulus was going to remain in play for the foreseeable future, the gold price would have rocketed head. Well last week it did on the announcement from Bernanke on stimulus, however since then it has succumbed to selling pressure. This just goes to cement the idea that stimulus is really not doing a lot to help grow the economy. So far there is no evidence to support the fact that stimulus equals inflation — well not yet — but we continue to feel that eventually it will evolve. However, we have always maintained a correlation between short-term bond prices and gold. As can be seen from the chart below for the 2yr note over the gold price.
If the yields were going down (futures up) the prospects for gold look better. Likewise if yields are up (futures down) the prospects for gold look disappointing. Of late we have refocused on this correlation, as the 2 yr note futures have spiked (yields down) due to Bernanke’s comments but gold, after a short spike higher, has just continued to slide. It is currently out of sync with this correlation. Intuitively, if futures go up (yields down) the prospects for price pressures to the upside should increase in the short-term. It is an argument around the fact that there is more money in the system to spend. At the moment we can see that gold is lagging behind and if stimulus is to be kept up to the markets in the short term, the gold price needs to be supported. If the correlation holds it value, which we feel it should.
We have been in and out of the market more than usual over the last few weeks and this is because of opportunity. At the moment we have decided to go long Gold at US1222 as we feel that it is at the bottom of the recent range and also believe that stimulus will be keep up to the market for the next few months and maybe into the new year. As such Gold at these levels should be supported.
We are long at US1322 with a stop at US1280.
Chart Point – Gold:
The range looks to be US1420 on the top and US1300 on the downside. If we get a break through US1270 then lower prices will prevail. Given momentum indicators have bounced we like the prospects of a small long at market (US1322), with a target of US 1400 as a target. Our stop is in at US1270.
We remain long at US1292.
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