Despite gold prices dipping to 6-months lows, hedge fund manager Damir Tokic remains bullish.
Tokic summarizes the bearish and bullish perspectives on today’s volatile gold market and claims that the research of his fund, Macrotheme Capital Management LLC, supports more strongly the gold bull position.
Technically, the bulls see a strong long-term uptrend, which is still intact, and view the recent price action (since the peak of September 2011) as a healthy consolidation before the uptrend continues. On the other hand, the bears see the potential bubble in gold with significant downside once the technical support is broken. Thus, technically speaking, both the bulls and the bears are playing a classical bubble-game, which can be notoriously volatile.
Fundamentally, the bearish case for gold is based on a prediction that the global economy has survived the financial crisis, and thus buying gold to insure against the doomsday-scenario makes no sense. The bulls, on the other hand, don’t really agree that “we are out of the woods yet,” frequently referring to the global currency wars, and the continuing QE by the Fed.
Our research shows more support for the bullish case for gold based on the two facts, one fundamental and one technical. First, fundamentally, the Federal Funds futures are currently predicting that the Fed will increase the interest rates to 50 basis points in May of 2015! (Figure 1) As early as December 2012, the prediction for the Federal Funds rate in May 2015 was only 30 basis points (Figure 2), which is not meaningfully higher from the current level of 14 basis points. Essentially, the Federal Funds futures imply no real end in sight for the current crisis over the next 2-3 years, and that’s a fact.
Yes, the chart in Figure 1 looks steep, but selling gold now, based on the possibility of “baby-step” increases in interest rates 2-3 years from now, does not make much sense. Technically speaking (ignoring the fundamentals), the long-term chart of gold futures resembles a rising bubble, which has not peaked yet. History shows that bubbles usually end in panic buying and exhaustion, followed by a bubble bust. The price of gold has been consolidating for last 18 months since the peak, and that’s also a fact (Figure 3). Thus, we did not have a classical bubble top in gold, which will likely occur at much higher prices.
In summary, fundamentally the bull market in gold still has room to run, strictly based on the current economic forecast embedded in the Federal Funds futures. Technically, the gold bubble has not peaked yet. As a result, we believe that gold is about to enter the last stage of a long term bull market, possibly characterized by a parabolic rise.
To read the full analysis, click here.
MINING.com Editor | February 18, 2013