Exiting Our Position in BAR
Thursday was a tough day for gold as bullion prices dropped over 2%, stopping out our speculative position in our favorite gold tracking ETF.
The decline was blamed on investors preparing for next week’s Federal Reserve policy meeting, at which time the potential for reducing asset purchases will be discussed. Naturally, the prospect of tapering has some gold investors worried that diminished liquidity—and the corresponding potential for higher interest rates—will create a significant headwind for the yellow metal.
That fear was underscored by the 2% rally in the 10-year Treasury Yield Index (TNX) today, which certainly didn’t help matters for gold. The U.S. dollar index also showed strength, in turn further weighing on the metal.
The dollar’s recent strength is worth emphasizing since it has been arguably the main reason why gold hasn’t been able to get a meaningful rally started this summer. There are times when gold can rise in conjunction with a strengthening dollar, particularly when investors’ fears over the geopolitical or economic outlook are intense. Now isn’t one of those times, however.
In fact, we’ve lately discussed the decisive lack of fear in the market and why the “fear factor” is essential for a stronger gold market. Fear—be it fear of inflation or geopolitical worries—is gold’s number one catalyst, and right now it’s not in sufficiently abundant supply to warrant a runaway gold bull. This can be seen when looking at the CBOE Volatility Index (VIX), which is currently at 18—well under the pivotal 25 level that indicates excessive fear—and a sign that investors’ fear levels aren’t sufficiently high to roil stock prices and thereby increase safe-haven demand for gold.
An even more emphatic proof that investors aren’t afraid of taking on risk right now is the recent show of strength in bitcoin and other cryptocurrencies. Bitcoin has become somewhat of a contrarian indicator for gold, and I’ve noticed that rallies in my favorite bitcoin tracker, the Grayscale Bitcoin Trust (GBTC), have typically been bad news for gold (and vice-versa).
The bottom line is that until fear makes a well-timed reappearance (whatever form the fear might take), gold and silver are going to have a hard time gaining any meaningful traction.
What to Do Now
We were stopped out of speculative long position in the GraniteShares Gold Trust (BAR) on September 16 after its decisive intraday move under the 17.70 level. We’ll wait for the metals broad market to bottom out and (ideally) for the dollar index to weaken before making any additional trades in BAR. SELL