A Gold Trade Most Haven’t Thought of

04/03/2012 3:30 pm EST

Focus: COMMODITIES

John Netto

Author, The Global Macro Edge

New forces are coming soon that will spur a new leg higher in gold, predicts John Netto, who explains why buying gold using a foreign currency can help dampen risk.

As traders all know, there are still opportunities in gold. We’re here with John Netto to talk about where he sees opportunities in gold here and going forward.

John, talk about gold prices. Where do you think we are now and for the rest of 2012?

Well, contextually, gold rallied in August. It hit that high near $1925 following the downgrade of US Treasuries by some of the ratings agencies out there.

We’ve seen, in September, a lot of volatility. In fact, gold had its biggest down day in September when it sold down more than $100. Since then, there’s been a lot of psychological damage, and some technical damage as well, done to the gold market.

When I look at gold right now, I see a market that’s building a base between the $1650 level and the $1900 level, but it’s a base that will ultimately be broken as we rally to the upside.

Why is that? What do you think is going to spur that rally?

Well, there are a couple of things. When we talk about gold, we talk about gold prices in US dollars. We also talk about gold prices in euros and gold prices in yen.

I mean, look at the Bank of Japan. They’re definitely going to engage in some quantitative easing. Europe, when it comes to what the ECB is going to do and the crisis going on over there, so we’re dealing with not only the US dollar, but central banks around the world that are engaging in a very debasing type of behavior which will ultimately contribute to gold rallying across multiple currencies.

So, should you buy gold in another currency? Is that a good trade?

I think it’s a great trade, and when we talk about buying gold in another currency, you can mitigate or dampen some of the volatility risk.

When we look at hedge funds out there and global macro funds, we all ask ourselves this one question: What is the best risk-adjusted return for my money?

By taking gold priced in euro, which, two-and-a-half years ago, one ounce of gold would cost 750 euro. Now it takes close to 1300 euro to buy one ounce of gold.

So, we’re taking two products, the euro and gold, which have historically inversely correlated to the US dollar, and we have one product of that spread—gold—which is outperforming the other in euro. You have a great risk-adjusted return, and I see that trend continuing.

How do you actually put on a trade like that as a retail trader buying gold in euros? What do you do?

Open up a futures account. You can trade the COMEX and buy one CME gold contract. That gives you 100 ounces of gold, and then you can go ahead and short one euro contract, and that performs the same way as being long gold priced in euro.

So long one gold contract, short one euro FX contract, and there you go.

What kind of technical analysis on a chart are you doing to get an idea of profit targets, stop losses, that sort of thing?

Same as we do with another product. You can take a software platform like CQG or some others out there. There are other Web sites out there that price gold in euros, and the same way that gold moves in dollars, there are some of the similar technical dynamics as well.

Gold priced in yen right now is breaking out and is doing very well. We’ve seen what I believe is a new campaign of trading the Japanese yen in terms of being long dollars in terms of yen; being long the aussie dollar in terms of yen, and the same thing is set up with gold as well.

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