Technical Analysis: Commodity Play
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February 8, 2010
Forbes recently conducted interviews with a number of billionaires to get their views on the year ahead. When asked about his view on Gold, the owner of the Dallas Mavericks, Mark Cuban, said, "Gold is a religion; it's not an asset class. It is always a bubble, so I am a sell."
Gold bugs certainly won't like that comment on a number of levels, but they have plenty of reasons to smile after Gold's fantastic run since October 2008. In fact, the yearly bar chart below shows it has barely stumbled since 2001.
Chart 1 - GC-SPOTV Yearly
click here to enlarge
Or do they have a reason to smile? Well, that depends on where they are located and/or if they understand and utilize currency hedging. Anyone based in the US can be happy with their returns in this case, but there are similar traps that can occur in our commodities or instruments.
The sad part is that some investors outside the US who have held Gold over the past 12 months have lost money or not seen anywhere near the gain you would expect, considering Gold futures are up over 60% from the low in October 2008. In fact, anyone based in Australian that bought Gold between late January 2009 and early April 2009 is still down. Looking at Chart 2 you are probably thinking this is impossible, but it's not. This issue can affect investors from any country and often is not something that is noticed until it's too late.
Chart 2 - GC-SPOTV Daily
click here to enlarge
The problem is that most instruments that act as a vehicle to invest in Gold are based in US Dollars. Looking at the US Dollar Index Futures below gives a clue as to what has occurred. The dollar has fallen against other major currencies, offsetting the gains made by many gold investors from outside the US.
Chart 3 - DX-SPOTV Daily
click here to enlarge
The next chart combines Gold futures (USD based), the ASX Gold ETF (AUD based) and the AUDUSD FX pair. This provides a better picture of the similar movement that has between Gold in USD and AUDUSD. An Australian Investor holding a long position in Gold futures throughout 2009 would have gained 2.91% in AUD terms out of the 24.33% increase in Gold (not including brokerage).
Chart 4 - GOLD, GC-SPOTV and FXADUS Daily
click here to enlarge
What becomes clear is that much of Gold's recent 'increase' is a function of the dollar falling.
The moral of the story here is to be careful with instruments based in another currency, no matter where you live. In some cases you may be able to find an equivalent in your currency, while others may require a hedge position. Another option is to find stocks on your local market that are likely to benefit from the expected price movement. When in doubt, of course, the last option is to look for another opportunity.
Happy Trading
Jordan Craw
Trading Tutors Team
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