My introduction to working in the commodities market came during the summer of 1977, when I worked delivering telex messages at the leading raw materials trading company in the world. In the days before email and computers, telexes or cables connected the traders and traffic clerks with counterparts all over the planet.
Most of the departments were set up with traders sitting in private offices and the traffic personnel in cubicles nearby. The traders did the buying and selling, while the clerks shipped the materials from points of production to consumption. The precious metals trading department was different. Gold and silver had just started trading on the COMEX futures exchange in the US in the mid-1970s. While the other trading departments were quiet, the precious metals traders stood with a phone in each ear, and the blaring sound of prices coming from squawk boxes from the floor of the exchange. Philipp Brothers traded precious metals around the clock on business days with offices in New York, London, and Hong Kong.
Precious metals trading was the hub of excitement at the firm. Little did I know that a little over a decade later, I would be in charge of that worldwide department. I grew up in the gold market, and over the recent weeks, the yellow metal has become exciting once again.
The VelocityShares 3X Long Gold ETN product (UGLD) turbocharges the price action in gold on the upside. In a runaway bull market, UGLD would be an explosive asset.
A bullish reversal
The week of July 29 was a busy time in markets across all asset classes. After the Fed disappointed markets with a 25-basis point cut, and less than dovish comments by the Chairman of the central bank on July 31, the price of gold dropped to just above the $1400 per ounce level.
The weekly chart shows that the price of gold fell to a low at $1400.90 on August 1, the day following the Fed meeting. On that day, President Trump decided to slap another 10% tariff on $300 billion of Chinese goods to the United States. Once again, the US President became frustrated with the pace of the trade negotiations when his team was in Shanghai last week. The news on trade lit a bullish fuse under the gold market.
The Fed cited "uncertainty" and "crosscurrents" caused by trade as a reason for the first rate cut in over a decade. The development in trade on August 1 was a sign that more declines in the short-term Fed Funds rate are now more likely. Uncertainty rose just one day after the July FOMC meeting.
Gold put in a bullish reversal on the weekly chart during the week of July 29. The price fell to a lower level than the previous week and closed above the prior week's peak on the highest level of volume in 2019 and since the beginning of 2018.
The bullish reversal gave way to more buying during the week of August 5, even a higher level of volume on a combination of the technical pattern from the previous week and Chinese retaliation on trade. China devalued its currency and canceled purchases of US agricultural products. The situation that was formerly a trade dispute is now looking like a full-fledged trade and currency war.
Four factors are telling me that gold will continue to shine after the recent series of new highs. I believe that the yellow metal is now heading for a new all-time peak after breaking out to the upside in June.
Reason one: Central bank policy and buying
Global central banks continue to follow an accommodative path when it comes to monetary policy, and the escalation of the trade dispute will only exacerbate the dovish policies.
Last week, the US Fed cut the Fed Funds rate for the first time in over a decade. Moreover, the world's leading central bank ended the program of balance sheet normalization one month early. The end of quantitative tightening takes the upward pressure off US rates further out along the yield curve. The trade war is likely to cause rates to drop before the end of 2019. Chairman Powell told markets that the move on July 31 was not the start of a prolonged period of rate cuts. The deterioration in relations between the US and China could make him eat those words.
Before we heard from the Fed, the European Central Bank told the world that rates are moving lower and quantitative easing will make a return because of the sluggish economic conditions in the eurozone. The Brexit deadline is on October 29. The new British Prime Minister says that he intends to take the UK out of the EU with or without an agreement. Uncertainty in Europe will rise over the coming weeks.
The second-largest economy in the world belongs to China. The devaluation of the yuan is another accommodative factor facing the world. The bottom line is that the world's central banks continue to provide stimulus, which is rocket fuel for the price of gold.
At the same time, the world's central banks continue to be net buyers of gold. While they rarely talk about the yellow metal, they continue to increase holdings. Gold is the ultimate reserve currency, which is why the IMF includes gold as part of a nation's foreign currency reserves.
Reason two: Currency devaluation around the world
After dropping to a low at $255 per ounce in 2001 as the Bank of England sold half of its gold reserves, the price of the yellow metal has been in a bullish mode. Gold took off to the upside and rose above the $1000 level for the first time in 2008, and it has not traded below that level since 2009. Gold rose to a peak at $1920.70 in 2011 and then consolidated between $1046.20 and $1377.50 from 2014 through 2019. In June, gold broke to the upside in what could be the start of the next leg to the upside on the way to challenge the 2011 peak. At the $1505 level on the continuous futures contract on August 12, gold was around 21.6% below its record high.
The monthly chart of gold in euro currency terms shows that the price has also been in a bull market since the early 2000s. At 1338 euros per ounce on August 12, the price of gold was 2.8% below its all-time high from 2012 at the 1377 level. In Swiss francs, the price of gold was at the 1454.50 level on August 5, 12.5% below its record high at 1662.50 in 2012. Gold has already risen to a new all-time high at just over 1245 British pounds per ounce.
The Japanese yen is another leading reserve currency in the world. In yen terms, the price of gold has rallied to the 158,180 level, which is a new record high above the previous high from 2013 at 152,457 yen per ounce. The recent devaluations in the Chinese yuan have put the price of gold in the Chinese currency at a record level. Gold is also at a new high in Australian and Canadian dollars and most other fiat currencies around the globe.
Gold's rise in all currency terms is a comment on the value of fiat foreign exchange instruments. The trend in all currencies is a fundamental validation of the bull market in the yellow metal as the faith and credit of legal tender decline.
Reason three: The long-term chart
The long-term chart shows that both price momentum and relative strength indicators are rising at the upper regions of neutral territory, leaving more upside potential for the price of gold. Open interest, the total number of open long and short positions in the COMEX gold futures market, has been rising with the price of the precious metal. In a futures market, growing open interest and the increasing price are typically a technical validation of a bullish trend. Finally, at 15.18%, semi-annual historical volatility is perfectly positioned for gold, which is a hybrid between a currency and a commodity. The measure of price variance is higher than most world foreign exchange instruments, but it is lower than most raw material markets. At the 15% level, there is no reason why the rally cannot continue to carry the price of gold to the 2011-high.
Reason four: Uncertainty - UGLD on dips in a bull market will turbocharge returns
Finally, the Fed cited "uncertainty" as a reason for cutting the Fed Funds rate and ending its quantitative tightening program on July 31. Uncertainty in the world is an understatement these days. The trade war between the US and China has taken the center of the stage this week and threatens to destabilize the global economy. In Asia, North Korea remains a potential problem as President Trump and Chairman Kim have done little but exchange pleasantries and love letters. In Europe, Brexit is coming soon, and Prime Minister Boris Johnson has said he is prepared to leave the EU without any agreement. A hard Brexit could cause confusion and contagion to ripple across markets around the world. And, the UK is not the only problem facing Europe these days on the political and economic fronts. In the Middle East, US sanctions on Iran have increased the potential for hostilities in the region that is home to over half the world's oil reserves. In the United States, perhaps the most contentious Presidential election in history will take place in November 2020.
The world has been volatile throughout history. However, the temperature has been climbing over the past months, and all signs point to at least a few crescendos that will increase fear and uncertainty. On August 5, the US stock market fell sharply and we could be at the start of a risk-off period in markets across all asset classes.
Gold is a safe-haven, and if its price is going to begin to climb rapidly in dollar terms, the VelocityShares 3X Long Gold ETN product is likely to act like the yellow metal on steroids. On August 1, the price of gold fell to a low at $1400.90 and on August 7 it rose to a high at $1509.90 on the continuous futures contract, a rise of 7.78%. UGLD has net assets of $153.31 million. While the ETN trades an average of 145,485 shares each day, UGLD charges an expense ratio of 1.35%.
The price of gold futures rallied by 7.78% from August 1 through August 7. UGLD moved from $117.02 to $145.44 over the same period. The appreciation of 24.29% was just over triple the percentage move in the gold market.
UGLD can be a useful tool if the bull is going to continue to charge higher in the gold market. A look around the world tells us that gold is one asset that will continue to climb.
In high school, I first walked into the precious metals trading room that I would eventually run. Gold has been in my blood for over forty years, and I have never seen the stars line up for the metal as it has in the current environment.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.
The author is long gold