Best of the Week
Most Popular
1.UK General Election BBC Exit Polls Forecast Accuracy - Nadeem_Walayat
2.UK General Election 2017 Seats Final Forecast, Labour, Conservative Lib-Dem, SNP - Nadeem_Walayat
3.UK General Election 2017 Forecast: Conservative 358, Labour 212 Seats - Nadeem_Walayat
4.Theresa May to Resign, Fatal Error Was to Believe Worthless Opinion Polls! - Nadeem_Walayat
5.UK House Prices Forecast General Election 2017 Conservative Seats Result - Nadeem_Walayat
6.The Stock Market Crash of 2017 That Never Was But Could it Still Come to Pass? - Sol_Palha
7.[TRADE ALERT] Write This Gold Stock Ticker Down Now - WallStreetNation
8.UK General Election Results Map 2017 vs 2015 vs Opinion Polls - Nadeem_Walayat
9.Orphaned Poisoned Waters,Severe Chronic Water Shortage Imminent - Richard_Mills
10.How The Smart Money Is Playing The Lithium Boom - OilPrice_Com
Last 7 days
Nether Edge By Election Result: Labour Win Sheffield City Council Seat by 132 Votes - 23rd Jun 17
Grenfell Fire: 600 of 4000 Tower Blocks Ticking Time Bomb Death Traps! - 22nd Jun 17
Car Sales About To Go Over The Cliff - 22nd Jun 17
LOG 0.786 support in CRUDE OIL and COCOA - 22nd Jun 17
More Stock Market Fluctuations Along New Record Highs - 22nd Jun 17
Understanding true money, Pound Sterling must make another historic low, Euro and Gold outlook! - 22nd Jun 17
Green Party Could Control Sheffield City Council Balance of Power Local Election 2018 - 22nd Jun 17
Ratio Combo Charts : Hidden Clues to the Gold Market Puzzle - 22nd Jun 17
Steem Hard Forks & Now People Are Making Even More Money On Blockchain Steemit - 22nd Jun 17
4 Steps for Comparing Binary Options Providers - 22nd Jun 17
Nether Edge & Sharrow By-Election, Will Labour Lose Safe Council Seat, Sheffield? - 21st Jun 17
Stock Market SPX Making New Lows - 21st Jun 17
Your Future Wealth Depends on what You Decide to Keep and Invest in Now - 21st Jun 17
Either Bitcoin Will Fail OR Bitcoin Is A Government Invention Meant To Enslave... - 21st Jun 17
Strength in Gold and Silver Mining Stocks and Its Implications - 21st Jun 17
Inflation is No Longer in Stealth Mode - 21st Jun 17
CRUDE OIL UPDATE- “0.30 risk is cheap for changing implication!” - 20th Jun 17
Crude Oil Verifies Price Breakdown – Or Is It Something More? - 20th Jun 17
Trump Backs ISIS As He Pushes US Onto Brink of World War III With Russia - 20th Jun 17
Most Popular Auto Trading Tools for trading with Stock Markets - 20th Jun 17
GDXJ Gold Stocks Massacre: The Aftermath - 20th Jun 17
Why Walkers Crisps Pay Packet Promotion is RUBBISH! - 20th Jun 17
7 Signs You Should Add Gold To Your Portfolio Now - 19th Jun 17
US Bonds and Related Market Indicators - 19th Jun 17
Wireless Wars: The Billion Dollar Tech Boom No One Is Talking About - 19th Jun 17
Amey Playing Cat and Mouse Game with Sheffield Residents and Tree Campaigners - 19th Jun 17
Positive Stock Market Expectations, But Will Uptrend Continue? - 19th Jun 17
Gold Proprietary Cycle Indicator Remains Down - 19th Jun 17
Stock Market Higher Highs Still Likely - 18th Jun 17
The US Government Clamps Down on Ability of Americans To Purchase Bitcoin - 18th Jun 17
NDX/NAZ Continue downward pressure on the US Stock Market - 18th Jun 17
Return of the Gold Bear? - 18th Jun 17
Are Sheffield's High Rise Tower Blocks Safe? Grenfell Cladding Fire Disaster! - 18th Jun 17
Globalist Takeover Of The Internet Moves Into Overdrive - 17th Jun 17
Crazy Charging Stocks Bull Market Random Thoughts - 17th Jun 17
Reflation, Deflation and Gold - 17th Jun 17
Here’s The Case For An Upside Risk In The Global Economy - 17th Jun 17
Gold Bullish on Fed Interest Rate Hike - 16th Jun 17
Drones Upending Business Models and Reshaping Industry Landscapes - 16th Jun 17
Grenfell Tower Cladding Fire Disaster, 4,000 Ticking Time Bombs, Sheffield Council Flats Panic! - 16th Jun 17
Heating Oil Bottom Is In.(probably) - 16th Jun 17
Here’s the Investing Reason Active Funds Can’t Beat Passive Funds—and It Worries Me a Lot - 16th Jun 17
Is There Gold “Hype” and is Gold an Emotional Trade? - 16th Jun 17
The War On Cash Is Now Becoming The War On Cryptocurrency - 15th Jun 17
The US Dollar Bull Case - 15th Jun 17
The Pros and Cons of Bitcoin and Blockchain - 15th Jun 17
The Retail Sector Downfall We Saw Coming - 15th Jun 17
Charts That Explain Why The US Rule Oil Prices Not OPEC - 15th Jun 17
How to Find the Best Auto Loan - 15th Jun 17
Ultra-low Stock Market Volatility #ThisTimeIsDifferent - 14th Jun 17
DOLLAR has recently damaged GOLD and SILVER- viewed in MRI 3D charts - 14th Jun 17
US Dollar Acceleration Phase is Dead Ahead! - 14th Jun 17
Hit or Pass? An Overview of 2017’s Best Ranked Stocks - 14th Jun 17
Rise Gold to Recommence Work at Idaho Maryland Mine After 60 Years - 14th Jun 17
Stock Market Tech Shakeout! - 14th Jun 17
The #1 Gold Stock of 2017 - 14th Jun 17

Market Oracle FREE Newsletter

The MRI 3D Report

Gold Price Has Passed the Lows

Commodities / Gold and Silver 2016 Jan 18, 2016 - 03:40 PM GMT

By: Bob_Kirtley

Commodities

We preface this article by stating that we are neither gold bears nor bulls. We traders and we target trades with the best possible risk reward dynamics, regardless of market direction. At the founding of our service, SK OptionTrader, we were bullish on the yellow metal and banked considerable profits as gold rallied to all-time highs. Beginning in 2013 we took a heavily bearish view, and again banked triple digit returns on gold as it declined. Now, we believe we have seen the lows and are preparing to get long gold once again.


Fear around the effects of China’s currency devaluation has led to turmoil in financial markets. Equities have sold off, bonds have rallied, and volatility has spiked. The medium term future of US monetary policy has been thrust into darkness as concerns around the economic outlook have risen rapidly.

As a result of the change in market dynamics we believe that gold has the potential to rally sizeably from here and that there is the potential for gold to challenge both the medium and long term downtrend lines. This means that the medium term lows around $1050 are highly unlikely to be visited in the coming months and we intend to take full advantage of that.

Gold has failed to rally on key bearish events

Gold and US real rates have long held an inverse correlation. When rates were cut and the Fed embarked on massive QE, gold rallied to all-time highs. Once the Fed implemented QE3 the economic outlook improved. This meant that more QE would be unnecessary and that the current measures would be tapered off. While this took place gold fell back from its all-time highs, entering a bear market in April 2013.

In December 2015 the Fed raised interest rates for the first time since 2006. This began a new tightening cycle and was accompanied with overall hawkish sentiment and dot projections that indicated the Fed expected another 100 basis points of hikes would be required in 2016.

This was the most hawkish monetary policy since action taken in nearly a decade and should have been heavily bearish for gold. However, the yellow metal failed to break through support at $1050 and did not even challenge the longer term support level of $1030.

At the beginning of this month the employment report showed that nonfarm payrolls had increased by a considerable 292,000 and that previous two prints were revised upwards by 50,000 new jobs. This is the type of improvement in economic data that the Fed would use as good reason to hike rates again. Therefore the print should have sent gold lower, as it made further hawkish action more likely. Yet, gold maintained its strength on the print and has failed to break support at $1080 in the week since.

What will drive gold down?

If gold cannot break to new lows on a hiking cycle and continued economic strength, then what will drive the metal lower?

Fresh ECB QE is likely to be bearish for gold for the same reasons that QE3 in the US was. However, the ECB is unlikely to announce new measures at their meeting this week. This means that the earliest likely target is their March meeting. Therefore before March 10th there is unlikely to be a major catalyst to drive gold down outside the US.

The next Fed hike has the potential to push gold lower, as it will drive home the point that rates are rising and that we are now in a tightening cycle. This means we must ask, when will the Fed next hike?

Given the current financial turmoil on the back of China’s currency devaluation, it is near certain that the Fed will not use their January meeting to raise rates again. The mayhem also means that March, which we had previously believed to be highly likely to hold the next hike, is much more uncertain with market pricing now shows the chance of a March hike to be just under 30%.

It is highly unlikely that shocks that cause other markets, such as stocks, to fall would cause gold to fall also. Gold is a safe haven asset, and therefore unforeseen events are much more likely to drive the metal higher than lower. Therefore, our bearish factors are limited to monetary policy. Given that major central banks are unlikely to take action that will be bearish for gold, there is no significant catalyst to drive gold lower this month, the next, and at least the opening weeks of March.

Does this mean gold is going higher?

Just as the lack of a bullish catalyst will not cause gold to fall, the lack of a bearish catalyst does not necessarily mean that gold will rally. However, in this case we believe that there are a number of reasons that lead us to the view that gold prices are heading higher.

Firstly, there is the discrepancy between bond prices and the price of gold. Bond prices have risen as the chances of a Fed hike in the next three months have decreased. Gold followed bonds higher initially, as per their long term relationship, but the metal has failed to continue the upward movement.

As a result, the current bond market indicates that gold is in fact heavily underpriced and should be much higher. Based on the last close for SHY, an ETF tracking 1-3 year Treasury Bonds, gold should currently be trading above resistance at $1150. However, Friday’s close puts gold at $1088.60.

This discrepancy is too large to be just noise. Therefore either gold prices must rally or bonds fall. For bonds to fall there would have to be an increase in the expected probability of the first hike coming sooner. This is means that concerns around China’s currency devaluation would have to dissipate, markets would have to calm and equities begin to recover. For this to all take place before the March FOMC meeting is highly unlikely.

A much more likely scenario is that concerns will persist for some time, and that markets will recover more slowly. This means that bond prices are much more likely to rally than fall from here. This in turn means that gold is likely to rally more than the $60 it is already under-priced by.

Therefore, the next $100 move in gold is higher, not lower, and is likely to take place inside the next two months. This means that the medium term lows are in and that it is time to get long gold, or at least cut any short exposure.

What is the trade?

There are a number of ways to access movement in gold. One could buy GLD, the ETF that tracks gold, but this is not the vehicle lacks any leverage to the metal. One could by gold stocks, but given the market dynamics there is a strong argument against this.

Suppose that one held the view that gold was going to rally due to continued financial market mayhem, as we have covered above. Then surely they must also hold the view that equities will continue to fall. It is much more likely that gold mining stocks will be sold off as a stock than bought into a rally as a gold vehicle. This means that overall gold stocks are a poor investment in the current market conditions and far from the best way to access the coming rally in gold.

We believe the best way to gain leveraged exposure to this rally in the yellow metal is through options. A fine-tuned options strategy here can be geared to take advantage of the exact market situation and gain significant leverage to gold while keep risk limited.

A strategy that stands out for us immediately is selling vertical put spreads on GLD. Our analysis shows that a bearish catalyst for gold is unlikely to be in play until March, so we will look to options with March expiries. We will now consider such a trade with strikes around $100, which corresponds to $1050.

If gold falls less than $40 between now and March when these options expire, then the trade will make its maximum profit. While this is not a heavily bullish trade and the upside is not astronomical, the trade still has very positive risk reward dynamics. Even if market conditions change rapidly and begin to recover, this trade is still likely to bank its maximum return.

We are also considering much more bullish plays if market dynamics continue to become more bullish for the metal. Should gold break through the long term downtrend line, currently just below $1200, then we will look to take advantage of the new bullish trend by opening much more aggressive positions. If you wish to see exactly when we execute these trades and how we trade rising gold prices in the future, please visit www.skoptionstrading.com.

Sam Kirtley

Email:bob@gold-prices.biz

URL: www.silver-prices.net
URL: www.skoptionstrading.com

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. Winners of the GoldDrivers Stock Picking Competition 200

Disclaimer:  www.gold-prices.biz   makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents our views and replicates trades that we are making but nothing more than that. Always consult your registered adviser to assist you with your investments. We accept no liability for any loss arising from the use of the data contained on this letter. Options contain a high level of risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. Past performance is neither a guide nor guarantee of future success.

Sam Kirtley Archive

© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife