Gold has traded range-bound since 2013, mostly in the range of 1100 to 1300. With increasing volatility after the bottom of last week and increasing geopolitical risk gold can prove to be a good hedge. The third quarter has been seasonally a good quarter for gold exposure moreover with the increasing disconnect between the stock market valuations and the real economy gold exposure can be very important.
While the bullish moment trigger after the election is losing steam, with lack of real policy and the potential for the FED to raise rates is vanishing with weaker inflation readings the case for gold to break above the 1300 level can sign a break to the upside.
Furthermore, the solutions engineered after the crisis did not solve the debt issue only transfer the debt from private sector to the public sector. But the lack of meaningful structural reforms worldwide means that when the next crisis hits it can be much more significant. While we do not expect a recession given the current economic indicators the margin trade and computer driven strategies together with increasing passive allocations by private investors have crushed volatility.
The breaking of these trading strategies can come more abruptly than expected and while we have no specific timeline for that to happen we see gold as a good hedge given the limited downside risk and the provided upside protection in case this occurs.
