Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Dow Stock Market Dow Trend Forecast Current State - 22nd Apr 21
Gold Rebounds Amid Positive Economic Reports - 22nd Apr 21
China's record first quarter fuels strong expansion in 2021 - 22nd Apr 21
Gold Price Next Key Level - 22nd Apr 21
Here's What to Look For When Hiring a Real Estate Agent - 22nd Apr 21
Ethereum EIP 1559 and Raven Coin - 21st Apr 21
Gold, USDX: The Board is Set, the Pieces are Moving - 21st Apr 21
World Economies Need to Find a Lot More COPPER! - 21st Apr 21
DogeCoin CRASH! Time to Start Mining BOODGIE Coin! Crypto Mania 2021 - 21st Apr 21
Pausing Stocks and Gold Fireworks - 21st Apr 21
Precious Metals and Miners Start of New Longer-Term Bullish Trend - P2 - 21st Apr 21
Looking For A Mortgage Broker? Here Is How To Hire One - 21st Apr 21
Amazon AMZN Stock PRIMEDAY SALE! Trend Analysis - 20th Apr 21
Stock Market Sentiment Speaks: You May Not Believe My 2021 Targets - 20th Apr 21
Stock Market Phase Two Projection - 20th Apr 21
Are Precious Metals & Miners Starting A New Longer-Term Bullish Trend? - 20th Apr 21
Inflation: First the Gain, Then the Pain… - 20th Apr 21
8 Stock Market Indicators in 1: Here's the Message of the Panic/Euphoria Model - 19th Apr 21
Gold - You Can Win a Battle, but Still Lose the War - 19th Apr 21
Will Interest Rates Rally Further Push Gold Price Down? - 19th Apr 21
Gold Fireworks Doubt the Official Inflation Story - 19th Apr 21
YuanPay Team Discuss The Process Of Crypto Diversification - 19th Apr 21
Central Banks May Ramp Up Gold Buying - 18th Apr 21
How to Get Rid of Driveway Weeds With Just WATER! 6 Months later NO Weeds, Ultimate Killer! - 18th Apr 21
State of the European Markets - DAX, FTSE, CAC, AEX, SMI, IBEX 35, S&P/MIB, Euro Stoxx 50, RTS - 18th Apr 21
Einvestment Fund: What You Need To Know About Investments - 18th Apr 21
Google Alphabet (GOOG) AI Deep Mind Stock Trend Analysis - 17th Apr 21
Stocks and Bonds Inflationary Slingshot - 17th Apr 21
Best Smartphone Selfie Stick Tripod Review by ATUMTEK Works with Samsung Galaxy and Iphone - 17th Apr 21
How to Give Budgie's First Bath | Easy Budgie Bathing and Water Training with Lettuce - 17th Apr 21
Record-breaking Decrease in New Passenger Vehicle Sale in Europe - 17th Apr 21
US Stocks Climb A “Wall Of Worry” To New Highs - 16th Apr 21
Gold’s Singular Role - 16th Apr 21
See what Anatomy of a Bursting Market Bubble looks like - 16th Apr 21
Many Stock Market Sectors Are Primed For Another Breakout Rally – Are You? - 16th Apr 21
What Skyrocketing US Home Prices Say About Inflation - 16th Apr 21
Still a Bullish Fever in Stocks? - 16th Apr 21
Trying to Buy Coinbase Stock on IPO Day - Institutional Investors Freeze out Retail Investors - 15th Apr 21
Stocks or Gold – Which Is in the Catbird Seat? - 15th Apr 21
Time For A Stock Market Melt-Up - 15th Apr 21
Stocks Bull Market Progression Now Shows Base Metal Strength - 15th Apr 21
AI Tech Stocks Buy Ratings, Levels and Valuations - 14th Apr 21
Easy 10% to 15% Overclock for 5600x, 5900x, 5950x Using AMD Ryzen Master Precision Boost Overdrive - 14th Apr 21
The Current Cannabis Sector Rally Is Pointing To Another Breakout - 14th Apr 21
U.S. Dollar Junk Bond Market The Easiest Money in History - 14th Apr 21
The SPY Is Nearing Resistance @ $410… What Is Next? - 14th Apr 21
The Curious Stock Market Staircase Rally - 14th Apr 21
Stocks are Heating Up - 14th Apr 21
Two Methods in Calculating For R&D Tax Credits - 14th Apr 21
Stock Market Minor Correction Due - 13th Apr 21
How to Feed Budgies Cucumbers - Best Vegetables Feeding for the First Time, Parakeet Care UK - 13th Apr 21
Biggest Inflation Threat in 40 Years Looms over Markets - 13th Apr 21
How to Get Rich with the Pareto Distribution - Tesco Example - 13th Apr 21
Litecoin and Bitcoin-Which Is Better? - 13th Apr 21
The Major Advantages Of Getting Your PhD Online - 12th Apr 21
Covid-19 Pandemic Current State for UK, US, Europe, Brazil Vaccinations vs Lockdown's Third Wave - 12th Apr 21
Why These Stock Market Indicators Should Grab Your Full Attention - 12th Apr 21
Rising Debt Means a Weaker US Dollar - 12th Apr 21
Another Gold Stocks Upleg - 12th Apr 21
AMD The ZEN Tech Stock - 12th Apr 21
Overclockers UK Build Quality - Why Glue Fan to CPU Heat sink Instead of Using Supplied Clips? - 12th Apr 21 -
What are the Key Capabilities You Should Look for in Fleet Management Software? - 12th Apr 21
What Is Bitcoin Gold? - 12th Apr 21
UK Covd-19 FREE Lateral Flow Self Testing Kits How Use for the First Time at Home - 10th Apr 21
NVIDIA Stock ARMED and Dangeorus! - 10th Apr 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

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

© 2005-2019 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

6 Critical Money Making Rules