Tuesday, October 6, 2009

Gold, the new "risk" trade

The risk trade is back on. The markets have taken the happy pill and off to the races we go. The Aussies have raised interest rates and that was a signal that "all is well" again with the world. AUD and equities are on the move, and gold is moving with them.

source: Bloomberg

Yes, gold now trades like a "risk asset" rather than a "safety asset". That means it moves in tandem with equities (which is the opposite of what the relationship used to be). As discussed earlier, the liquid risk trade is the carry trade, the equities trade, and the liquid commodities trade. But we know some US politicians and the CFTC have been on a warpath to limit "speculation" by capping the amount of a commodity one investor can hold. That means that if you are a pension plan and you need to allocate to commodities, be prepared to get your position capped. And those who are over the limit may be forced to liquidate. The same has been the case with some ETFs as our friend Larry recently discovered.

But there doesn't seem to be the same impetus to cap futures positions in gold. The rationale is that high gold prices (unlike high fuel prices) don't hurt anyone. Really? Gold jewelry demand is weakest in almost 20 years and manufacturers, distributors, and stores are struggling. Anyone remember Fortunoff collapse? But their lobby is not strong enough to push for caps, so gold is becoming more of a de facto commodity. GLD, the SPDR gold ETF now holds the amount of gold that is equivalent to half annual global mining supply (some $37 billion worth of gold). It is likely going higher (potentially much higher), with prices and volume in part distorted by likely caps on other commodities.

So welcome to the new risk trade: equities, high rate currencies (against the dollar), and GLD.

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