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The Most Crowded Trades Today: Assessing Gold’s Benefit

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Nov. 20 2020, Updated 3:33 p.m. ET

Too much cash

According to a regular survey of fund managers at Bank of America Merrill Lynch, fund cash levels are above average but at the highest incidence of downside hedging in 14 months. The average cash balance is 4.8%, which is higher than the ten-year average cash level of 4.5%.

Cash levels in the economy are higher when investors are skeptical about the outlook for stocks and bonds.

Also, the Bank of America Merrill Lynch survey found that fund managers seem to be pessimistic about global growth prospects. According to this survey, only 25% of respondents expect a stronger economy in the next 12 months, compared with 62% at the start of 2017. Fund managers also increased their underweight stance on the US (DIA) (DOW).

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Most crowded trades

The survey also revealed that Bitcoin is the most crowded trade right now. The cryptocurrency has climbed ~350% so far this year. According to 26% of the investors surveyed, being long in bitcoin is the most crowded position today.

The long NASDAQ trade came in second place, with 22% of investors mentioning it as the most crowded trade. The third-most-crowded trade is the short US dollar trade. The dollar has fallen almost 10% in 2017, and hedge funds appear to be positioning for a further downside.

Your gold investments

The survey shows that fund managers believe that global equities are overvalued, but fund managers are meanwhile interested in the short USD trade, and the allocation to cash remains above average. These factors are usually bullish for gold’s investment appeal. If gold prices are expected to rise, gold equities could outshine gold due to their leverage to gold prices. Gold miners such as AngloGold Ashanti (AU), Iamgold (IAG), and Coeur Mining (CDE) provide leveraged exposure to gold prices.

Investors with a higher risk appetite might be interested in more leveraged gold ETFs such as the Direxion Daily Gold Miners Bull 3X ETF (NUGT) and the Direxion Daily Junior Gold Miners Bull 3X ETF (JNUG).

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