Is gold about to pop and put the real squeeze on the shorts?

We have opined in depth on this blog on numerous occassion over the last several weeks that gold is likely forming an important bottom. Such has been the level of negativity and degree of short positioning in the commodity, it appears inevitable that the price can only go one way short term – who is left to sell the paper market as the “physical” is certainly well supported. Check out the gold tab on the categories on the right to read our various pieces.

From being bears on the yellow metal last year (see guide below for an understanding of our reasoning at the time and which has pretty much played out exactly as we suggested, even down to the $1200 price forecast), we believe firmly now that the dynamics are in favour of a resumption of the bull trend on gold.

The “smart” way to play this, in our opinion, is however via the gold mining arena rather than directly on the gold future itself – either via ETF’s on the sector (GDX & GDXJ) or specific company picks (our sister company Titan now has a dedicated Precious Metals fund in its portfolio – visit www.titanip.co.uk if you wish to position yourself with us – our own capital is on the table). 

A prime example of the opportunity for price gains in the sector is the chart below which shows the Goldbugs index (HUI) relative to the Gold ETF YTD. You can see the glaring underperformance. We expect this to be corrected over the remainder of this year and should the gold price rally back towards $1400-1450 then the Gold miners are likely to materially outperform on the way up.

Gold Bugs index v Gold price YTD chart

The beauty of buying the miners however, and specifically via a sectoral spread of companies, is that even if the gold price plateau’s or falls further (which we do not expect), such is the lowly valuation of the asset class and so hated/underweighted by fund managers globally is it, that the chances of further material falls for the sector overall is pretty slim. The weak will be allowed to go to the wall/mines mothballed/taken over and so the remaining companies in the sector will be stronger.

In looking at the gold price itself though – see chart below – we see a classic flag formation on the 2 hourly chart that looks to us as if it is ready to make an ascent on the $1300 and onwards towards $1400 over the next several weeks. In our fund we are positioned perfectly to take advantage of such a move.

Richard Jennings Fund Manager Titan Investment Partners