SGOL Weekly: The Best Way To Play The Recessionary Environment And The Epic Policy Support In The U.S.
Summary
- SGOL has consolidated slightly recently, reflecting a slowdown in investment demand caused by easing investor fears, which, in turn, has resulted in a pick-up in long-term U.S. real yields.
- Given the negative price seasonality for gold prices in May, it wouldn't be a surprise should gold prices experience some temporary weakness.
- This is especially true considering that long-term US real rates could move still higher on growing expectations the re-opening of the economy and the resulting rebound in economic activity.
- Taking a step back, however, we think that the recessionary/depressionary macro environment and the epic monetary/fiscal policy support will underpin a downtrend in US real rates.
- Against this, we maintain our long-term outlook for SGOL.
Investment thesis
Welcome to Orchid's Gold Weekly report. We discuss gold prices through the lenses of Aberdeen Standard Physical Gold Share (NYSEARCA:SGOL).
SGOL has consolidated slightly in recent days, reflecting a slowdown in investment demand caused by easing investor fears, which, in turn, has resulted in a pick-up in long-term US real yields.
Source: FRED, Orchid Research
While a further increase in long-term US real rates cannot be ruled out in the immediate term, we think that the current macro environment and the epic fiscal/monetary policy support in the US will, ultimately, result in a sustained downtrend in US real rates in the coming months. This is, ultimately, bullish for SGOL.
For May, we caution that gold's price seasonality tends to be slightly negative, inducing us to be prepared for a potential dip in the gold price.
This would be a buying opportunity, in our view, considering that our overarching view is that the COMEX gold price should hit an all-time high late in 2020/early in 2021.
In the same vein, we expect SGOL to reach an all-time high either late in 2020 or early in 2020.
Source: Trading View, Orchid Research
About SGOL
For investors seeking exposure to the fluctuations of gold prices, Aberdeen Standard Physical Gold Share is, in our view, a great long-term investment vehicle, with a small expense ratio of 0.17%.
The average spread over the past 2 months is at 0.07%, suggesting that the ETF is also well suited from investors with a short-term horizon.
Further, the legal structure of the fund prevents trustees from lending the precious metal held in the Fund.
The Fund physically holds gold bars in vaults based in London (U.K.) and Zurich (Switzerland) custodied by JPMorgan.
SGOL's assets total $1.75 billion.
Importantly, SGOL, which was launched in September 2009, tracks closely its benchmark - the London PM fix for gold, as the chart below shows.
Source: SGOL
Speculative positioning
Source: CFTC, Orchid Research
The speculative community lifted by the equivalent of 41 tonnes its net long position in COMEX gold in the week to April 28, driven by both short-covering (25 tonnes) and fresh buying (16 tonnes).
The resumption of spec net buying activity confirms our view that the macro backdrop for the yellow metal is now sufficient bullish to stop the wave of spec selling over February-April. As we noted last week:
Given the friendly macro environment for alternative safe-havens to the dollar and the positive momentum in gold prices, we think that the speculative community could jump back in on the long side of COMEX gold.
Implications for SGOL: Although spec positioning in COMEX gold is heavy, we expect some further spec buying in the coming months due to the positive macro backdrop for gold. This should push SGOL higher.
Investment positioning
Source: Orchid Research
ETF investors bought gold at a robust clip of 31 tonnes in the week to May 1, the 7th consecutive week of inflows. The COMEX gold spot price registered a loss of 1.6% over the corresponding period, pointing to some "buying on the dips" activity.
Last month, ETF investors accumulated 186 tonnes of gold, representing an increase of 7% in gold ETF holdings. So far this year, gold ETF holdings have jumped by 463 tonnes or 19%.
While the significant increase in gold ETF buying reflects a marked improvement in investor sentiment toward the yellow metal, we contend that this is partly the result of buying activity from an increasing number of momentum chasers/macro tourists, with an investment horizon skewed to the short term. As a result, gold is vulnerable to ETF liquidation in case of a negative shift in momentum.
Implications for SGOL: Remarkable investment demand for gold has pushed the COMEX gold price solidly higher this year, which, in turn, has pushed SGOL higher.
World Gold Council (WGC) confirms a huge increase in investment demand for gold in Q1
Source: WGC (Orchid edits)
Global gold demand increased marginally by 13 tonnes or 1% year on year (YoY) to 1,084 tonnes in Q1.
Taking a closer look, there was a huge increase in investment demand for gold (+239 tonnes or +80% YoY) in the first quarter. This more than offset the large decrease in jewelry demand (-208 tonnes or -39% YoY) and the modest declines in central bank demand (-12 tonnes) and technology demand (-7 tonnes).
This resulted in an increase of 21% YoY in the LMBA gold price in the first quarter.
On the supply side, mine production and gold recycling were hindered by the COVID-19 lockdown measures, resulting in a decline of 4% YoY in total gold supply in Q1.
Source: WGC
Implications for SGOL: The huge increase in investment demand for gold in Q1, combined with supply disruptions, resulted in a noticeable appreciation in the gold price. Given the uncertainty in the global macro outlook caused by the COVID-19 shock and the epic policy support provided by major central banks, especially in the DM world, investment demand for gold is likely to remain robust in the medium to long run. This is positive for SGOL.
Closing thoughts
Given the negative price seasonality for gold prices in May, we would not be surprised to see pockets of weakness in the gold price this month. This is especially true considering that long-term US real rates are already very low and seem to be inclined to move higher as the market focuses on the re-opening of the economy and the resulting rebound in economic activity.
Taking a step back, however, we think that the recessionary/depressionary macro environment and the resulting epic monetary/fiscal policy support will underpin the downtrend in US real rates in the months ahead, which will boost investment demand for gold and underpin its long-term price uptrend.
Against this backdrop, we maintain our long-term constructive outlook for SGOL.
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