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.
