SUMMARY
written by Vince Lanci for Marketslant.com
Be careful what you wish for. More equity funds are buying Gold as a hedge against stock exposure. That is a 2-edged sword.
OVERVIEW
Gold is reflecting many basic worries that have no seeming resolution on the horizon
- Eurozone elections,
- Problems in Venezuela,Greece,Italy,
- Currency changes in India
GOLD AWARENESS INCREASES
We've noticed more stock market 'hedgers' buying the rally. This growing number of buyers hedging their stock market exposure would appear to be solid evidence of a changing view towards Gold. And for sure it does reflect anxiety and raised awareness to Gold and Silver's qualities in the broader markets.
We want to add an important historical caveat that should not be ignored. Ever.
THE CRASH OF 1987 WAS A DISASTER FOR GOLD
In 1987 on the morning of the Stock market crash, Gold was called to open "limit up". When the Comex actually opened, futures were trading Limit Down. This was almost entirely a function of margin calls being issued for funds who had bought stock on margin and had to raise cash immediately.
The first thing these funds did was liquidate all other holdings in subservience to their stock positions. That meant Gold, their hedge, got dumped.
SIZE MATTERS WHEN THE EXIT LIGHT GOES ON
Fund managers did not understand the size of the Gold market then and the resulting stampede killed Gold. In the end they had to puke their stock positions to, but not until they and their advisors told them to liquidate their winners first. Gold went from being a winning effective hedge to a loss.
Many funds still do not understand the importance of exit liquidity. We strongly advise you as a Gold Investor to brace yourselves if Stocks drop precipitously again. It would be a buying opportunity for sure. But only if you are not leveraged.
BE BULLISH STOCKS
History may not repeat itself. Many Funds understand the risks now. But newer funds run by managers who only know the world of Bernanke and Yellen may not.
Just know that more people are using Gold as a stock market hedge right now. That is not a bad thing in and of itself. It is a horrible thing if those buyers are long stocks on leverage. And if recent history of funds using Gold as a hedge for 'event risk', like the Brexit Gold Exit are any indication, the risk to Gold is real.
If stocks were to plummet, we'd like to see gold hold. Seeing this, we could reasonably assess the market as balanced between sellers liquidating to handle stock margin calls and buyers expecting a QE 4 or in the least another 'non-rate hike' quarter.
What a Gold investor should want is for stocks to not selloff, but trade sideways now. This will be a sign of market balancing future economic expectations, which includes high values due to inflation's effect on earnings. This in turn makes Gold the undervalued asset for those stock longs looking for something else to buy.
We are on the road and writing with less than ideal graphic capabilities. A thank you to George Gero for some of he data below.
THIS MORNING
- Gold pausing recent rally, ahead of President Trump speaking tomorrow night
- Traders considering March Open Meeting of the FED as well
- Friday's WSJ had a gold story. Assume more buying with headline watchers at least initially
TAPE WATCHING:
Open interest near year high 456,473 in futures
Funds added as 1250 area was reached.
Momentum funds now buying alongside genuine 'worry money'
Copper 276018 also good amount OI.
Silver open interest is 210,996.
Gold-silver ratio 68.35,
Gold-plat 228.80
Dollar index 101 and change
April-June spread gold 330, as rollover not a factor yet.
Interactive chart here
Good luck. Silver story next as the market has indeed started its climb to the $21 area where that big chunk of calls was sold last week as reported here.
Read more by Soren K.Group
