Gold BTFD

Via Goldman:

Momentum-based trading systems have been popular for decades, given their low correlation with traditional benchmark returns and, therefore, their potential for generating alpha. The strategies tend to have common components, including set rules for entering and exiting positions. Although there are a variety of methods employed to produce a trade signal, many rely on simple moving averages—such that a buy (sell) is triggered if spot moves above (falls below) a specified moving average. Other popular methods include “crossover strategies,” where a trader goes long (short) if a faster-moving average exceeds (breaks below) a slower-moving average, and “breakouts,” where a trader buys (sells) an asset if spot surpasses (undershoots) the prior high (low) over a certain time horizon. For example, the “Turtle Experiment” of 1983 relied primarily on a breakout-based system, according to Faith (2013). Despite the different methodologies, CTAs tend to see similar returns, especially during periods of large market moves (Exhibit 1). In fact, according to Clenow (2013), most of the variation in returns between funds comes from factors such as asset composition, risk level, and position size, rather than the specific trade signal.

…even though CTAs are probably already short Dollars, we see scope for further weakness as (i) fresh shorts could be triggered soon and (ii) longer-term investors start to participate as well, particularly in the Euro and other European assets.

This may prove right, not least amid the hysteria of fakeflation, but it is counter-intuitive stuff. As I noted this morning, weak DXY:

and strong EUR:

are both very stretched. For gold to keep rallying, both of these will need to persist with their trends into big oversold and overbought conditions.

Remember, EUR is the key input into DXY and DXY the key input into gold. More precisely, the relative strength or weakness of the underpinnings of DXY – monetary, fiscal, strategic etc – determine gold’s value.

I expect both to do so, but the more the market leans one way the harder it is to push it further so I’d expect it to be more difficult for both than has been the case so far.

Likewise for gold which has a long history of violent corrections amid bull rallies.

At least, that’s how markets used to work. During the fakeflation it has all been about momentum and positioning be damned so it’s quite possible that the market just keeps getting more imbalanced.

Those that agree with MB’s longer-term bull case for gold should use these pullbacks as opportunities to dollar average into miners.

Presumably, that’s why this:

Warren Buffett’s Berkshire Hathaway made its first investment in a gold miner last quarter, even though the famed investor has warned against betting on the precious metal for at least two decades.

The conglomerate bought 20.9 million shares of Barrick Gold, worth about $564 million at the end of June, according to its latest portfolio update. The miner was its only new holding in the period.

The news of Buffett’s backing sent Barrick’s stock price up as much as 11% on Monday.

Berkshire’s move is a shock given Buffett’s repeated dismissal of gold as a compelling investment.

He has called it less appealing than a farm or a business because it doesn’t produce anything, and pointed out that it has massively underperformed stocks in the long term.

And this:

Legendary investor and Platinum Asset Management founder Kerr Neilson will leave the fund manager’s investment team at the end of August after concluding his proteges don’t need him around anymore, and he can apply his time and wealth to other causes.

But stepping away from the market altogether is not so easy for the billionaire who introduced global investing to Australia. He is bullish on gold, which has shattered records this year as US real yields turned negative and monetary stimulus stokes fears of sovereign default risk.

“You have to have gold,” he said. “The system’s too discordant not to have gold.” He owns both the commodity and the equity, although suspects gold miners will eventually run the boom’s course by over-investing in new production.

Crucially, central banks are also supporting the price of gold by adding to their reserves such that they can avoid sanctions, or insure against foreign exchange devaluation.

“All these despotic places have been adding to their gold.”

Gold miners NEVER kill gold booms, just as falling jewellery demand doesn’t either. Marginal additions to supply or withdrawal of demand are tiny relative to investment demand. Investment demand is the ONLY marginal price setter for gold.

The higher the price goes, the more marginal the miners that should be bought.

David Llewellyn-Smith
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