Using the Euro to Trade Gold
Featuring Brannigan Barrett
Published on: April 16th, 2019 • Duration: 15 minutes • Asset Class: Currencies • Topic: Bonds, Euro, GoldBrannigan Barrett, CIO of Habitus Capital, makes his Real Vision debut with a bullish trade idea on gold. He suggests going long the yellow metal in euros, noting the deteriorating economic data in Europe. He also points out key levels for traders to watch for, and touches on risks to his trade, in this interview with Roger Hirst. Filmed on April 12, 2019 in London.
ROGER HIRST: Welcome to Real Vision's Trade Ideas. Today we're with Brannigan Barrett of Habitas Capital. Brannigan, it's your first time on Real Vision Trade Ideas. Could you tell us a little bit about yourself?
BRANNIGAN BARRETT: Hi, Roger. Yes, so I've been trading now for eight years, pretty much predominately proprietary. 2017, started my own fund. Got two guys working with me and yeah, we're developing some really, really good things, a combination of automated, discretionary, and a whole bunch of fun things. But yeah, looking forward to explaining my trade idea to you today.
ROGER HIRST: Great. And today, you're looking at gold, which is one of the favorites on Real Vision. It comes up quite a lot. But this is gold with a slight twist. Could you explain what your trade idea is, the twist, and maybe break down the trade idea itself as well.
BRANNIGAN BARRETT: Cool. So yeah, we really like the idea of being long gold. But we don't really like being long gold in dollar terms. So we've had to look at how we can find sort of a natural hedge against further sort of movement in the dollar. So what we're looking at is actually gold in euro terms, for a number of good reasons as I'll explain to you as we go forward.
But we're looking around the 1150 area for entry points. We've got a good 5% stop, so somewhere around the $10.75, and looking for a move to at least break above that 1300 and potentially even target 1400s, which is sort of record highs. We've never really been above there.
So it's a trade that's got sort of 5% downside, with roughly 10% to 20% upside. So really good risk reward metrics. And like I'll explain to you, some really good synopsis to it, which was why we like the trade.
ROGER HIRST: OK. So if you could break that down. So you're effectually long gold in euros. So you've got two components, you're effectively long two things or long one thing and long short another thing. Could you break those down and then we'll pick on each part of that.
BRANNIGAN BARRETT: OK, so, I think the place to start is why euro? OK. If we look at the euro now, one of the first charts we sort of want to bring up is having a look at Europe versus Japan. Now if you take a close look at it, there's a lot of similarities between what happened to Japan in the '90s, and what's happened to Europe since the financial crisis.
And, you know, if you go and look at the actual fundamentals of Europe, and you look at the growth metrics of Germany, France, Italy, you'll note that we've never fully recovered. I mean back in the day, Germany was capable of 2 and 1/2%, 3%. Nowadays, they're forecasting 1% for 2019. Same for France. And Italy is going to grow at 0.1%.
So it's really a dynamic where Europe has never fully recovered, even with all the Central Bank policy. And that's the next sort of part of the play, is that we believe the Central Bank is completely stuck now. You know, if you have a look at the second chart we provided, which is with regards to the economic indicators, you'll see that inflation and the PMIs, the composite PMIs, they all topped out in 2017.
So, back in 2017, that was effectively the top for the growth of Europe. And at the same time that was when the ECB backtracked from 80 billion to 60 billion initially. They then began the tapering at the back end of 2017. So there's a real strong correlation between how much the Central Bank has done and how much Europe can effectively grow.
Now they stopped at the end of 2018. They're no longer buying bonds. And growth is where it is. You know, we've got inflation barely above 0.7 for core inflation. We've got PMI composite just above, you know, sort of the growth phase of 50. So the numbers aren't looking good.
And what's interesting if you had a watch of the ECB now on Wednesday, what we did take away from that was, Draghi came out very specifically said that, a lot of it has to do with external factors. So he noted that. But equally he said, they're rarely concerned about the five year five year inflation.
Now, if you do look at that chart, we're trading 130 forward, and that is the same levels we were trading back in 2016, when the ECB went from 60 billion to 80 billion, obviously they increased the amount of liquidity. So, what we are looking at is in essence the ECB has no choice but to take further measures this year.
In terms of timing, it's very important for our trade. But we're looking at June. We think June, the ECB goes further into negative territory for the deposit rate. And they're going to just have to keep going. They don't have a choice, simply because the numbers, Europe cannot grow without the ECB. And the ECB's job as they're mandated, is to maintain, or try and get towards 2% inflation.
So we do think euro dollar goes down to 106 this year. Towards the back end of the year. And we want to take part in that. We really want to be short euro. But we don't want to be short necessarily against the dollar. So so we like that play, and in a way we can express that sort of euro trade is by being long gold.
ROGER HIRST: So this is like the Japanification of Europe, but you think in that scenario, because of the Central Bank action, you're going to see a much weaker euro from here.
BRANNIGAN BARRETT: Yeah.
ROGER HIRST: So the European Central banks are pretty hamstrung at the moment. But then there's the gold element to this. So, you're looking at also being long gold. So why the gold bit?
BRANNIGAN BARRETT: OK, so gold is a three pronged approach. One of the charts that we've kind of supplied is a look at the correlation between gold and yields. OK? So it's a longer data yields. And you'll see over the last sort of two to three years, there's really been a very neat negative correlation.
So as yields start to fall off, we start to see gold prices rise. For obvious reasons, money tends to chase yields. But it's been quite a prominent correlation because of the fact of the amount of money in the system. So we're very interested in a long gold simply because we believe yields aren't going anywhere.
You know, anyone that likes to think that yields are suddenly going to start rising just because, at the end of the day, the Fed has hiked rates. They're at the end of the cycle, and yields still didn't rise. So it just shows us that yields, the direction for yields, is still down. And for that reason we like the gold.
The other play is actually a bit of a risk off play. A lot of people are talking about the end of this year, we're going to see a little bit of topping out in the equities. We do believe we're at the end of the cycle now. The Fed's pretty much done. We can't envisage any further hikes from the Central Bank you know or the Fed.
So what we're looking at is actually timing the short in the equities. Which is, we think there'll be a little bit of a sell off towards the back end of this year. So being long effectively in the gold allows us access to that trade, allows us access to the risk off now. If you've been watching gold over the last three, four years, the biggest monthly moves all come on risk off moves.
So it's very much a risk off play, coupled with the fact that when the cycle ends, we do tend to see equities underperform. We tend to see the bonds also underperform. And we will tend to see gold then outperform.
So it's kind of like just trying to get ahead of the cycle, trying to almost preempt the end of the cycle towards the end of this year and allow ourselves access to the gold trade.
ROGER HIRST: And with that sort of the dollar part of that element, do you feel that there's a danger that if we see a bit of dollar strength or euro weakness, but let's say we see dollar strength, that that dollar strength could negate some of the gold performance? So actually what you're doing is you're sort of complicating matters and the trade might go nowhere, would be my first kind of question.
And then the second one is, in 2008, if we see a real risk off, in 2008 we actually saw gold liquidated, like everything, because people just needed to raise capital. So isn't there a risk that, what you want to see for gold to go up is a declining outlook or environment, but in a really atrocious environment, gold's first reaction might also be down. So how do you play those? And also things have a bit of negative seasonality for gold coming next few months as well.
BRANNIGAN BARRETT: I think we start with the seasonality. Again, seasonality does tend to again, over the last two years, does tend to come in towards the end of the year. But that's in dollar terms. And that's the interesting thing is, the moment you shift that into euro terms, that seasonality is not as aggressive. In other words, yes, gold does tend to underperform sort of the latter of the year, July, August, September. But again, in euro terms it's a very different play.
Now with regards to the dollar, the difficulty with the dollar is that, it's not that we necessarily think the dollar is a long. We're not bullish dollar. But we don't think it's a short yet. And the simple synopsis there is you've had the Central Bank come out in December, telling us they are now at the effective neutral rate, which was a complete backtrack.
They've then gone and said, you know, they're going to stop it effectively winding down the balance sheet, which was sort of completely unexpected. In that scenario, whether with the Central Bank going from almost hawkish to dovish, a complete flip-flop in the space of two months, you would have expected the dollar to come under some significant pressure. But it hasn't. It's kind of held a bit. The price action still suggests that there's a little bit of a bet in the market.
But again, we're not worried about aggressive dollar appreciation, simply because, again, we do tend to think we're at the end of the cycle. So, whilst we think the dollar could potentially go upwards, it's a case of we think there's more likely going to be a lot more sideways move rather than an upward move.
ROGER HIRST: And in terms of you sort of thinking that the end of the equity cycle might be this year, isn't there a risk that actually what we've just seen is that the Fed flip-flop means more liquidity. Markets love liquidity. Equity wins up. And the Fed has said right you're going to probably do more of this. So actually couldn't we overshoot and carry on for a couple more years, in which case we don't get the end of the equity cycle, so therefore we don't get that negative vibe around the gold price potential?
BRANNIGAN BARRETT: Great question. And it plays into the risks of the trade. And I think it's important to assess those risks. Because yes, right now what we're seeing in the markets is loads of money in the market, every asset class is up this year, pretty much led by oil. Copper is up 10%.
Then the equities. And you go the S&P up 18% with the DAX just behind at 16%. So there is money flowing into risk. That's the crux of it. You know, gold is up in dollar terms. It's up 1% this year. Dollar's up just shy of a percent, so we rarely are seeing money flow towards sort of high yielding opportunity, higher risk.
And that is a risk. But again the way we think we kind of going alleviating that is that we believe that at this point in time, that so long as, if the equities keep going up and gold can just stay steady, in other words, not sell off, as we've seen. Now you remember, the fact that gold's up a percent this year, even with you know, S&P up 18%, means that there's something else as a variable that's holding the gold where it is.
And we think that variable has to do with global yields. We think so long as global yields remain compressed, and we don't see growth shoots or inflation shoots, we think we're fine in the trade. And that's one of the biggest risks to assess in this trade.
We're keeping our eye on two things. One, we need the ECB to go into more negative territory in June. That will put us on sides. And then the second thing is, just to make sure that the data doesn't turn too aggressively, now again, why we're not too concerned about that is because if there is going to be a turn in data, it's likely going to be led in the United States, which means we should still see the dollar hold against the euro. So we should be shielded.
What we don't want to see is a euro recovery. If we do see Mr. Draghi has spoken about it being transitory. He keeps hammering home that the labor cost is going to feed into inflation at some point. So long as we don't see that, so long as we see German bunds stay around that zero basis points, we think the trade is very well guarded, just simply because we are playing it in euro terms.
ROGER HIRST: And so it sounds like the components, really sort of the real conviction is that the euro is going to be on the back foot. The gold price is going to be steady to grinding higher, even if the dollar is flat to slightly higher as well. So it's really your sort of safety bet is the gold bit. But the euro is the real trade that you're putting on in a way.
BRANNIGAN BARRETT: Exactly. And I think it's a timing thing. I think the first bit of our trade, if it comes right in June, we're going to see it in the euro. That's kind of where we are leaning, is put us on sides in June. And then if we're right in terms of the timing of the cycle, and we do start to see the equities fizzles out a little bit, and we do get a risk off play, then we kind of get that double reward.
But we feel that even if we don't necessarily get that risk off in 2019, we feel that it's there in 2020. So it's just a case of keeping ourselves alive. That's what we're trying to do, is stay away from getting stopped out. And as it starts to grind, I mean it's some fantastic levels in that gold.
And as we start to break some of that resistance, we've got a three or four year high now. Why don't we take that out and hold a bit up above there, that 1,400 just becomes a natural you know, sort of path of least resistance for us.
ROGER HIRST: So in summary then, you're basically, long gold in euros, sort of fixing what you're saying, is you want to be short euros. You want to be long gold. You've got an entry point around about 1150 or below. Your target is to break 1250, which is the big level. Then potentially 1400 sometime over the rest of this year.
So it's a decent long term trade. And you'd get out, if you had a stop, I mean you'd probably say it wouldn't be a hard stop. At 1075 is where you'd be thinking, hang on a minute we may have got this wrong. But it's probably because the euro bit's wrong rather than anything else.
BRANNIGAN BARRETT: Well I think if we get to that 1075 point, if you go back and look at the charts, the timing of when we sort of were trading at those prices, it coincided with, not necessarily the equity sell off. I think that's where a lot of people get wrong. It was more to do with the bond yield sell off.
So, so long as bond yields stay compressed, we shouldn't see ourselves back at 1075. And if we do start to see it again, we've highlighted ten year. You know we are at 250 at the moment. 280 is the key. If we're at 280, you know, that euro gold probably going to be trading somewhere around that 1075 anyway. So it's a very nice play, because I think you can get forewarning.
I think you can watch the data, see how the yields respond. And if we stay below this 250 yield in the 10 year, you know the trade should just stay onside if not just slowly but surely creep up.
ROGER HIRST: OK. Thank you very much.
BRANNIGAN BARRETT: Thank you very much.
ROGER HIRST: Thank you, cheers. Brannigan's idea is to be long gold in euros. His entry point is 1150. His target is 1250 and then beyond up to 1400 over the rest of the year. And stock level would be around about the 1075 level. So that's gold in euros.
Remember, these are trade ideas and not investment advice. Do your own research. Work out your own risk limits. And then trade and invest accordingly.