Gold’s Run Is Not Over

10/12/2011 3:30 pm EST


John Netto

Author, The Global Macro Edge

The sharp recent correction in gold does not erase the long-term fundamental drivers that are still in place and likely to push the metal higher, says John Netto, who tells how to trade it.

We’re talking about gold today with John Netto. John, there was recently a huge selloff in gold; what’s the play here for retail investors?

Well a lot of this comes at a time frame when many people and much the public was underexposed to the gold move, from the move up from $1200, $1300, all the way to $1925. 

The sense is that gold will move too far too fast, and as a result, people didn’t want to chase the move. Well, the issues that helped gold rise are still very much in play.

There is still a lot of question and concern about debasement of currencies around the world. Overall, in terms of what various central banks are doing, that’s still very much in play, and overall, peripheral and sovereign debt concerns have not been solved either.

So we look at a way to have a real currency, a solid currency, gold still meets all those needs despite a short-term technical correction.

Do you view the gold trade as a bubble?

Absolutely not. I think the drivers behind gold are very much in play and continue to be in play. 

When we ask about a bubble, let’s look at gold within the context of other markets. Gold, since it’s lows, if you want to look at it from 1972 to when it rallied up until the high of 1979, close to 900% or 1000%. 

Look at how much silver moved up. Gold, since it’s lows of 2001 at $250 an ounce up to $1800 an ounce is up about nine times. The Nasdaq was up 24 times. The two will bubble up 50 to 100 times, so on a case-by-case basis, you have a tangible item that represents a global currency for the last 5000 years that has on an inflation-adjusted basis not even reached $2200, our back row would have to be to reach its all time highs back in 1980.

There are a lot of things still favoring this secular gold move. Albeit, we’re in a very cyclical bear market right now.

Let me ask you about copper, the industrial metal that’s undergone a lot of selling also recently. What’s the play there?

There are a couple of plays. My trading style is to buy weakness in rising markets and sell strength in falling markets. When you look at copper and what it encapsulates, there’s a great deal of China behind it; there’s a great deal of US dollar behind that.

One thing that Operation Twist has done—which just came out recently from the Federal Reserve— is looking to flatten the yield curve, i.e., take the securities they have on their balance sheet, look to sell shorter-term dated securities, buy longer-term dated securities, and that’s going to put pressure on the short term and buoy the long term.

As a result of that, what they’re doing with those yields…they’ll bring the yields closer in line.

That has an impact as a funding mechanism on a lot of highly leveraged plays out there. When you look at hedge funds out there, large global macro funds, billion-dollar funds, they’ve been using currencies like the dollar, and like the yen, to fund some of these commodity trades.

And from a short-term structural basis, they’re having to unwind those positions, and that’s why it’s impacting gold, copper, crude to some extent, and even the equity markets to some extent, as much, if not more than the sovereign debt concerns and some of the global growth story that’s out there.

Let’s talk about the best way for retail investors to get into some of these metals and commodities. Is it though the actual commodity itself or through an ETF? What’s your view?

I think that for the retail investor, what they need is exposure. The biggest threat to anyone in retirement is inflation.

Especially with the debasement of the US dollar, which again is still very much a prevalent story, buy something like the SPDR Gold Trust (GLD), buy the Market Vectors Gold Miners ETF (GDX), because you want to own the underlying commodity, as well as the companies that mine and produce that commodity.

That gives you somewhat of a diversified exposure, but we’ve seen both of those, both GDX, which is the gold miners ETF that consists of the top 30 gold-mining stocks out there, come off rather precipitously recently here, and we’ve seen gold come off precipitously as well. So this is the time to at least put your toe in the water.

Do you own either of these ETFs?

I trade them actively and I own them either via calls or via the underlying.

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