Video

#SaxoStrats
Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Strategic trade
Trade view / 15 April 2016 at 8:40 GMT

#SaxoStrats: Gold rally unsustainable?

Head of Equity Strategy / Saxo Bank
Denmark
Instrument: GDX:xtsx
Price target:
Market price:
SaxoStrats
 
Theme

Gold miners are up 83% in USD since the bottom in January as gold had its best quarter in three decades driven by the Federal Reserve lowering their rate forecast on the backdrop of a weaker global economy. 

Our negative view on gold and gold miners is driven by macro fundamentals that are turning for the better as the USD as weakened enough to stabilise the global economy. China exports for March were up 12% (year-over-year), showing signs that China’s economy is improving. With the Dollar index around $95, the headwinds are fading providing a breathing space for emerging markets. 

We forecast the Fed to raise rates at least two times. Higher USD rates will be the predominant driver of lower gold price and subsequently lower share prices of gold miners. 

Valuation

Despite the recent bull market in gold miners, the industry group is still trading at 12-month forward P/E ratio of 30.2 on top of elevated debt levels. The net debt to EBITDA is currently 6.2 – significantly above healthy levels. 

Unless gold prices stabilise at current levels the industry will still experience downward pressure. We believe the valuation of gold miners is completely disconnected from the harsh reality of potential credit crunch in the industry as USD rates go higher and gold prices going lower.

Gold

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Source: Saxo Bank 

Management and risk description

Key risks include a weaker USD adding tailwind to gold. Further slowdowns in China and thje potential for a Brexit scenario on June 23 could extend gold higher. Also watch gold hoarding in China due to credit squeeze.

Gold
Source: Saxo Bank  

Parameters

Entry: sell at market.

Stop: trailing stop; stop price set at $26.03 (volatility based) with a step size of $0.31.

Target: $15.

Time horizon: six months.

— Edited by Michael McKenna

For more on equities and ETFs click here.

Non-independent investment research disclaimer applies. Read more
3y
tcat tcat
Thank you SierraPt. I was jsut thinking about that and thought someone is playing a joke. So here we go to opposite views thats how a market goes. I am long GDX maybe a little high entry but thinking that 40.00 is still on the table.
3y
goldfinger goldfinger
every time I trade gold I lose money.. This is the very last time. Good bye and good riddance.
3y
Neil D Neil D
Better change your nickname then!?!?
3y
Peter Garnry Peter Garnry
@SierraPt. and @tcat Kay's trade idea was made on Feb 25 around the peak of uncertainty and deterioration in economic data. Our thesis here on the equity desk, combined with the short-term view from our commodity strategist (Ole S Hansen), is that macro data are improving and US interest rate hikes are still on the table (two at least) which will eventually kill the gold rush. But let us see. In the end the bet on GDX/Gold is a macro view. We are positive, but if you are negative clearly long gold is a good idea.
3y
seas seas
Simple gold- buy when it goes down. If it goes down again, buy more. Don't sell it unless it goes up faster than usual. Jimmy Rodgers got rich this way.

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