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A New Gold Trade

Preempting the Preemptors

Written by Luke Burgess
Posted June 21, 2016

There are many investors betting on gold ahead of this week's Brexit referendum. The assumption is that there would be an immediate flight to safe-haven assets, like gold, following Britain leaving the EU. But ultimately, that's only an assumption.

The U.S. dollar is the world's main reserve currency and can certainly act as a safe haven against other fiat currencies like the British pound. Not to mention, there are other safe-haven alternatives that aren't gold. So betting on gold ahead of Brexit might actually backfire. And that's even if Britons decide to leave the EU on June 23rd.

New polls from over the weekend showed lower support for Brexit, which saved the British pound from breaching multi-year lows and sent both the U.S. dollar and gold significantly lower yesterday.

Gold US Dollar Index

But I'm not ready to reenter gold just yet.

Following a vote for Brexit on Thursday night, I expect a knee-jerk jump in gold prices. But I would also expect a lot of immediate profit taking, driving prices lower next week.

Following a vote against Brexit, I expect a sharp decline in the price of gold. This could be a buying opportunity that I think could take prices down as low as $1,260 an ounce. But I would still expect a bit of continued weakness in gold prices next week anyway, due to a lack of any major market-driving events like the Brexit referendum or last week's FOMC meeting.

So I want to wait until next week to be any kind of significant gold buyer. But I think we'll able to reenter gold stocks next week with prices below $1,250 an ounce. And I think that could provide another good opportunity for more small, short-term gains. Here's my plan for a new gold trade...

There have been four FOMC meetings since the Federal Reserve raised interest rates for the first time in over a decade back in December 2015. None have seen another rate hike. But all have seen the price of gold ending higher following the meeting.

We've made money playing this trade twice here in Energy and Capital — just last week following the June FOMC meeting and once back in April. But I think at this point, many gold investors have become aware of this little trick. And it's time we change up our game.

Instead of buying gold stocks to preempt an increase following the July FOMC meeting, we're going to buy gold ahead of the investors who may buy gold stocks to preempt an increase following the July FOMC meeting — then sell the shares to them at a premium.

In short, the plan is to buy gold stocks before most other investors get the idea of profiting from what might be the next price rally leading to the next FOMC meeting. And I think the perfect time to do this could be next week in an environment of weaker gold prices.

As I said, I think the price of gold is going to cool off next week due to a lack of any major driving events that would drive the market, regardless of what happens during the Brexit referendum. The following week, the markets will open on Tuesday after the July 4th holiday. That's when I believe a significant number of traders will begin thinking about and looking to position themselves ahead of the FOMC meeting on the 26th and 27th.

Best-case scenario for this trade...

Buy gold stocks on weakness next week. Sell them a week or so later (after July 4th) into a market of investors seeking leverage for rising gold prices ahead the July FOMC meeting at a premium.

Watch the price of gold very carefully over the next few days. As mentioned, I'm personally going to be a small buyer if gold goes below $1,265 an ounce this week following the Brexit decision. Any lower, and I'll be a stronger buyer. But I think next week we'll see either lower or horizontal prices until after the July 4th holiday.

Specifically, I would recommend looking to own Barrick Gold (NYSE: ABX) or Yamana Gold (NYSE: AUY) for this trade.

Even though Barrick has massive debt liabilities, it is the largest and most well-known gold producer in the world. Shares trade incredibly well, and the stock is perfect for this kind of short-term trade.

Yamana is not even among the top 10 gold producers, but AUY is still trading under book value. With a market cap last seen at $4.67 billion, the company is 0.94 times book value. Shares of AUY also trade very well and are priced lower than ABX, which could mean a larger overall gain.

Again, the plan for this trade is...

Buy gold stocks on weakness next week. Sell them a week or so later (after July 4th) into a market of investors seeking leverage for rising gold prices ahead the July FOMC meeting at a premium.

We're not seeking to leverage rising gold prices all the way through until the meeting. Rather, we're seeking to preemptively purchase gold shares during next week's assumed weakness to sell after July 4th into a market that may be seeking to ride gold prices through to the meeting. In short, the plan is to preempt the preemptors.

Bets wagered on other people's desire to make money for themselves are good bets. That's the plan here.

Until next time,

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Luke Burgess
Energy and Capital

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