From the May 2013 issue of Futures Magazine • Subscribe!

Gold bugs scatter

Metals, both precious and base, are measures of economic health. Precious metals serve as a store of value and base metals measure economic activity. Gold began an impressive rally at the beginning of this century as the long bull equity market came to an end. Analysts are debating whether or not we are in another secular bull equity market and many turn to gold as a gauge. But gold bulls are liquidating to get into U.S. equities as the Dow Jones set an all-time high in the first quarter of 2013.

Gold peaked in September 2011 at $1920.80 and has been mostly range-bound between $1,525 and $1,800 since then (see “Is it the end of world or end of gold bull?” below). The fear is that there is a wall of inflation awaiting us because of all of the liquidity added and quantitative easing executed across the globe to deal with the financial crisis. But many a fortune has been made and lost in gold on both sides of the market. If gold is the place to be when inflation spikes, many traders have realized that, like the end of the bull equity market predicted throughout the 1990s and eventually arriving in 2000, the market can remain irrational longer than traders can stay solvent.

“Gold is off, S&Ps are up. Fund managers have to move money to performance. There hasn’t been any new buying in gold,” says George Gero, vice-president of Global Futures RBC Capital Markets and long-time gold trader. He compares what is going on in gold to the mid- and late-1990s when many people correctly understood that the long equity market was coming to an end but lost money by being early. He says traders are in a wait-and-see mode and will wait for a sign of an exit (from QE) before going long again. And he doesn’t expect the next leg up in gold to happen for a year, barring some unforeseen geopolitical event.

Steve Platt, senior futures strategist at Archer Financial Services, says the market lost a lot of interest because of the movement in stocks. “It is movement from one asset class to another and stocks have been a favorite after being ignored for so long. Money has moved out of gold because it did have a sizable rally and people have taken profits.”

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