The Biggest Discrepancy in the World

A market that has grown in attention recently, but has yet to see any movement is the gold market. As of April 1st it has been reported that India, along with several other asian nations’ imposts of the hard asset have increased 471% compared to their imports of gold last year. In India for example these explosive imports of gold can increase the trade deficit that the struggle with as well as put lots of pressure on the rupee. Weirdly enough, while Gold demand has surged throughout the past year gold futures have decreased to all time lows for the year of 2021. 

When looking at the one year chart, from a purely technical perspective, there is definitely upside. Gold futures have been trading dramatically below their 200 day moving average, and if you take a look at the MACD-another technical indicator that can help determine trends in markets- it appears to be on a bullish upwards path. Gold trades very technically, and it certainly has a lot more upside rather than downside. In terms of risk protection, a trade in the gold markets would prove to be significantly more aysemtic than other potential trades in the market that are available. While technicals are important, it's even more important to take a look at the fundamentals behind this hard asset.

Let's start with Gold production, throughout the past couple of years, gold production as well as production costs have remained relatively stable without consideration. Gold production seems to have increased not too significantly from the years 2005-2020. Looking at global demand, as we already know, it has increased dramatically internationally. Besides Asia, many rich people have taken advantage of the overall decline in gold markets and have been putting great multitudes of their net worth into gold. So in plain vanilla economics terms, there doesn't seem to be a great surplus in gold supply demand. If we look at the allocation of gold to certain sectors, we can see that gold as an investment has increased.

If we look at the selling of gold by central banks, we can see that gold has been getting sold of strongly by central banks internationally, and there are buyers on the other side of this based on the thesis that there is weak monetary policy in the United States:

The final set of graphs that are worth studying are the movement and inflows and outflows of gold on the futures market. This might actually explain why we have seen gold prices at new lows in our financial markets. In terms of interest in gold and gold futures, we have seen a generally large decrease in the open interest in gold futures, which generally means less buying and more selling.  Another graph to look at is the COMEX net long positioning in gold futures. Generally speaking we have seen a very strong increase in interest from fund managers and institutional buying when gold was at $2000 was steadily increasing. It slowly started to decrease once again as gold began to fall. What is worth noting is the fact that individual buyers and other net longs have actually increased. While we don't know who these other net longs are, it is a great example of how strong of a discrepancy there is in the gold market, and about how people are trying to profit off of it. In 2021, it's also worth noting that people are buying it like crazy.

Let's talk about how to play this gold discrepancy, one way is through plain out buying the Gold ETF $GLD. Having equity in $GLD is great to have, and like the futures, the downside is significantly lower than the upside. Another similar play to be made alongside buying $GLD, you could make a large position in Gold royalties and gold miners, this would be a way of diversifying in the gold market, but generally speaking, diversification in this market is not a great idea if you are managing great sums of money, furthermore, it only makes sense to have positions in the strongest movers that will move in greater percentages and will maximize the profits to be made. One final play that could intertwine with the equity building positions in gold royalties and miners could be to take a position in $GLD, but in long dated calls rather than in an equity stake. We currently like the January 20th 2023 180-189 strikes on calls, they have a lot of asymmetric risk reward.