Why November could be the best time to re-join the gold bull run

The world's most popular trade points to further upside for ASX gold miners although you may have to wait till year end to see a payoff.

| More on:
figurine of a bull standing on gold bars

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The world's most popular trade points to further upside for ASX gold miners although the bulls may have to wait till the end of the year to see a payoff.

The wildly popular trade I am referring to is to short the US dollar. A survey by Bank of America found that 36% of fund managers called this their favourite play in August, reported Bloomberg.

This is up from 30% in July and it's well ahead of other favoured trades, according to BoA. This is the most bearish sentiment against the US dollar since the survey began and investors haven't been this underweight on the currency since 2008.

Gold benefits from a weaker US dollar

The pessimistic view on the US dollar is good news for gold as the two tend to move in opposite directions.

If the US dollar bears are right, the recent retreat of the gold price from record highs over US$2,000 could be relatively short-lived.

This in turn means the weakness in the Newcrest Mining Limited (ASX: NCM) share price, Evolution Mining Ltd (ASX: EVN) share price and Northern Star Resources Ltd (ASX: NST) share price is a buying opportunity.

Crowded trade risk is no deterrent

Shorts are bets that profit from a decline in value of the underlying asset, and these experts do not seem concerned that this is a "crowded trade".

A crowded trade describes a situation when most investors are betting on the same outcome. This often leads to volatility as the asset price will surge if all the short-sellers close their positions at the same time (called a short-squeeze).

As it stands, a number of hedge funds have already taken profit on their US dollar shorts as they believe the currency is set to rebound after tumbling around 10% since the March peak.

USD and gold outlook in 2021

However, no one believes the US dollar is going to make a big comeback – not even those that have closed their short positions.

Experts believe a weakening US currency will be an ongoing theme right through 2021, if not longer, although history suggests the greenback may find support over the next few months.

US dollar peak in November

Over the past decade, the Bloomberg Spot Dollar Index (a measure of the US dollar against other major currencies) registered gains in August to November.

Further, the index made a 3% average gain in the quarter when there is a presidential election. There's a US presidential election coming up this November, and the greenback may only peak after this event.

Eroding reserve status a boon for gold price

However, the bigger longer-term driver for the gold price will rest on whether the US currency loses its prestigious position as the world's reserve currency.

Some believe this unthinkable event is unfolding before our eyes as central banks around the world have been stocking up on gold over the past few years and are likely to hold less US dollar.

A divided America and the rise of protectionism is aiding this belief and creating a perfect storm for gold.

Motley Fool contributor Brendon Lau owns shares of Evolution Mining Limited and Newcrest Mining Limited. Connect with me on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Gold

A young woman sits at her desk in deep contemplation with her hand to her chin while seriously considering information she is reading on her laptop.
Gold

Down 30% since April, should I buy the dip on Northern Star shares today?

A leading expert delivers his verdict on Northern Star shares.

Read more »

Image from either construction, mining or the oil industry of a friendly worker.
Gold

Guess which $107 billion ASX 200 gold stock is storming higher today on record results

The $107 billion ASX 200 gold miner is storming higher today. Here's why.

Read more »

Happy man working on his laptop.
Energy Shares

Opportunity knocks: 2 ASX stocks ready to surge

Analysts expect big things from these shares.

Read more »

Miner looking at a tablet.
Gold

Up 58% this year, ASX 300 gold stock reveals 600,000 ounce African MRE

The ASX 300 gold stock is growing its mining footprint in Senegal.

Read more »

A woman in a business suit sits at her desk with gold bars in each hand while she kisses one bar with her eyes closed. Her desk has another three gold bars stacked in front of her. symbolising the rising Northern Star share price
Gold

Macquarie tips 28% upside for this ASX gold mining stock

Let's see what the broker is saying about this miner.

Read more »

An older female ASX investor holds a gangster-style fist pump pose showing off gold rings with dollar signs on them.
Gold

Macquarie says these 3 ASX 200 gold shares will 'outperform' in FY26

Gold shares have been on a long tear and Macquarie reckons these 3 ASX stocks have more room to run.

Read more »

Red arrow on gold bars going down.
Gold

Northern Star share price slides despite $1.2 billion net gold mine cash flow

Investors are bidding down the Northern Star share price today. But why?

Read more »

Miner looking at a tablet.
Gold

The end of the gold rush: Can these ASX Gold shares keep rising?

Has the gold rush run its course?

Read more »