By: Andrew Hecht
Commodity Analyst

  • The Swiss franc falls to a new record low against gold
  • The monarch of money has proven itself over and over
  • King dollar is the next shoe to drop in the currency market
  • The world’s central banks continue to provide the bullish fuel
  • I prefer bullion for holding, and leveraged instruments on dips for trading- UGLD is gold on steroids

Gold continued on its path higher over the past week. After breaking out to the upside in June 2019, the price of the yellow metal has made higher lows and higher highs. During the height of risk-off conditions in mid-March as markets across all asset classes became falling knives, the price of the yellow metal fell to a low of $1450.90 on the continuous futures contract. The low was only $4.70 per ounce above the mid-November 2019 bottom. Gold stopped short of violating its bullish price pattern that has been in place since August 2018 on the weekly chart. One month later, in mid-April, the price of the yellow metal was around $250 per ounce above the March low, which now stands as technical support.

Unprecedented levels of central bank and government stimulus continue to provide bullish rocket fuel for the gold market. As the money supply expands, all currencies are losing value against gold. Over the past week, another currency fell to a new record low against the yellow metal.

Central banks hold gold as part of their foreign exchange holdings, which validates gold’s position as a currency in the global financial system. Gold’s ascent over the past month has been nothing short of explosive, and the bull market looks set to take the precious metal to higher highs over the coming weeks, months, and perhaps years. Every dip in the gold market has been a buying opportunity since 2018. The global pandemic has caused volatility in the gold futures market to increase dramatically.

The Velocity Shares 3X Long Gold ETN product (UGLD) is a short-term trading tool that performs like gold on steroids.

The Swiss franc falls to a new record low against gold

When gold broke out to the upside in June 2019 after the US Fed told markets that interest rates would head lower by the end of last year, the yellow metal took off in all currency terms. Gold traded to a new record high in euros, yen, Australian and Canadian dollars, British pounds, Chinese yuan, Russian rubles, and most currencies around the world in 2019. The only two foreign exchange instruments that remained below their all-time low against the precious metal were the US dollar and the Swiss franc. Last week, gold made it to a new high in Swiss franc terms.

Source: CQG

The monthly chart highlights that the record peak in gold in francs occurred in 2012 at 1662.51 francs per ounce. Last week, at the high, it took 1701.97 Swiss francs to purchase an ounce of the yellow metal.

Source: CQG

The daily chart shows that gold in the Swiss currency probed above 1700 francs on April 13.

The monarch of money has proven itself over and over

The rise to a new all-time peak in Swiss franc was another in a long series of statements by gold that currencies around the world are losing value.

Source: CQG

The monthly chart of gold in euros shows that the price continues to post new highs after rising above the 2012 high of 1376.88 per ounce in August 2019. At the end of last week, gold in euros was over 175 euros above the breakout level at the 1555 level.

Source: CQG

The monthly chart of gold in yen terms shows that it broke above its record high from 2013 at 152,457 yen per ounce in July 2018. At around 182,000, at the end of last week, gold in yen was almost 20% higher than its previous record peak.

Source: CQG

Gold in British pounds continued to scream to higher all-time highs last week, and the same holds for almost all other fiat currencies. Last week, the Swiss franc joined the bullish party as the yellow metal is now in uncharted territory against the currency that has traditionally been a model for safety and security. 

With each new high, gold has cemented its position as the monarch of money. The next shoe to drop will be a challenge of the all-time high when it comes to the king of currencies.

King dollar is the next shoe to drop in the currency market

The US dollar is the reserve currency of the world as it is the foreign exchange instrument of choice when it comes to reserve management for central banks, governments, and monetary authorities across the globe. The dollar’s history of political and economic stability has made it the fiat currency of choice for reserve holdings.

The all-time high in gold in dollar terms came in 2011 when the yellow metal reached $1920.70 per ounce in the aftermath of the global financial crisis in 2008. Central bank stimulus in the form of historically low interest rates and quantitative easing that created a put under the bond market and a cap on interest rates further out along the yield curve contributed to the move in gold to a record peak. At the end of last week, the precious metal looked poised to challenge the 2011 high sooner rather than later. 

Source: CQG

The long-term quarterly chart of COMEX gold futures illustrates that the trend has been higher since gold found a bottom in late 2015 at $1046.20 per ounce. Price momentum and relative strength indicators are in overbought territory on the quarterly chart, but they could remain in that state for an extended period as the metrics did from 2004 through 2012. As of the end of last week, gold posted gains over the past seven consecutive quarters. From 2008 through 2011, the yellow metal moved higher over a dozen straight quarters. The most recent continuous contract high in gold in dollar terms was at $1775 per ounce, only $145.70 below the 2011 peak. The active month June contract on COMEX hit a high of $1788.80 last week.

The world’s central banks continue to provide the bullish fuel

Last week, analysts at Goldman Sachs told the market that the fallout from Coronavirus could be four times worse than the 2008 global financial crisis. The unprecedented level of liquidity during that period sent the price of gold to its record high of $1920.70 per ounce in 2011.

With the global economy in a self-induced coma, central banks and governments are pumping far higher levels of stimulus into the financial system to stabilize conditions. It will be a while before scientists come up with therapies and a vaccine to lower the risk of Coronavirus for people all over the world. The longer social distancing guidelines remain in place, the worst health crisis in a century will continue to impede business activity. With each day that the virus continues to take lives and make people ill, the impact of the required stimulus will have an exponential effect on economies around the world. If 2008 was a guide, the stimulus is bullish fuel for the gold market as it destroys the value of fiat currencies. The ascent of gold is more a commentary on the descent of currency values. Stimulus will continue in the aftermath of Coronavirus as the world begins to pick up the economic rubble. It could be years before central banks can take anything but a highly accommodative stance towards monetary policy. When it comes to governments and businesses, the virus will leave a long trail that includes mountains of debt and unprecedented deficits.

Before the global pandemic became the worst black swan event in a century, analysts at Citigroup projected that gold would reach $2000 per ounce. The global crisis and central bank stimulus are likely to make the target price for the yellow metal a lot higher.

I prefer bullion for holding, and leveraged instruments on dips for trading- UGLD is gold on steroids

At the $1700 level, a one-kilo bar of gold had a value of just over $54,660 at the end of last week. The kilo weighs around 2.2 pounds. In the current uncertain environment, I favor holding gold bars or coins as they directly reflect the price of the precious metal. When it comes to trading, the futures contract on COMEX is a direct tool as it has a mechanism for physical delivery.
The margin requirements for gold futures allows for significant leverage. For those looking for leverage in the gold market without venturing into the futures arena, the Velocity Shares 3X Long Gold ETN product (UGLD) provides an alternative. The fund summary for UGLD states:

Source: Yahoo Finance

UGLD has net assets of $204.17 million, trades an average of 202,135 shares each day, and charges a 1.35% expense ratio. Nearby June gold futures on COMEX rose from a low of $1453.00 on March 16 to a high of $1788.80 on April 14, a rise of 23.1% in one month.

Source: Barchart

As the chart shows, over the same period, UGLD appreciated from $115.06 to $210.21 per share or 82.7%, over triple the percentage gain in the gold futures market.

Gold rose to a new high against the Swiss currency last week, leaving the US dollar as the last foreign exchange instrument that has not declined to a new record low against gold. It may not be too long until king dollar bites the dust against the precious metal, which is the monarch of all forms of money.  

 

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