TIn what can only be described as a text book development, from a sentiment point of view, Standard & Poor’s has just announced the creation of a new index called the S&P 500 Gold Hedged Index:
“The Index seeks to simulate the returns of an investment strategy which is long the total return of the S&P 500 stock market index and long gold futures contracts, allowing investors to participate in the returns of the US equity market while hedging against a decline in the value of the U.S. dollar versus gold.”
We’ve seen this countless times. Every time an asset class or sector captures the imagination of the masses, Wall Street rushes in with new specialized products. This is so common it has a maxim: “when the ducks quack, feed them”. The last time I mentioned a similar product (Claymore Gold ETF) was this summer when gold was trading at $981. It didn’t see that level again until September.
Standard & Poor’s has licensed UBS to create and launch products based on the new index so look forward to an ETF and possibly future and option contracts. The announcement further explains:
The S&P 500 Gold Hedged Index is calculated as a combination of a long S&P 500 position overlaid with a long position in COMEX gold futures. The hedge only protects against adverse movements in the relative value of the U.S. dollar, as expressed in the dollar price of gold. Stock market risk is not hedged in any way.
The results of a gold-hedged index strategy, versus that of an un-hedged strategy, vary depending upon the movement of the gold futures contract and the U.S. dollar. By holding long gold futures contracts, investors may gain when the U.S. dollar loses value as expressed by gold. Conversely, they may lose when the opposite occurs.
Even if we ignore this most recent one, there have been several unmistakable signs of a top: gold going parabolic, gold’s Commitment of Traders report showing a crowded trade and gold sentiment being very very bullish. As well, gold has now reached 32% above its 350 day moving average. The 2006 top came after it reached +40% and the 2008 top at 38%.
While it is true that we are in a bull market for gold, indiscriminate buying based on emotion, rather than logic would make this like any other bubble we’ve seen before. And if you expect China’s central bank to continue to propel gold vertically, think again.
The Chinese are leery of gold at these prices and have explicitely said that they would not chase gold higher. They are fully aware of their impact in the gold market and are waiting for a drop back to the long term trend line to make any new purchases:
So expect gold to have major support when it does drop, but expect a drop. A return to test the significant $1000 level would convert that price point from long term resistance to long term support. It would also coincide with the rising long term support from the 200 day moving average (now at 975).
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