Best of the Week
Most Popular
1.The Brexit War! EU Fearing Collapse Set to Stoke Scottish Independence Proxy War - Nadeem_Walayat
2.London Terror Attack Red Herring, Real Issue is Age of Reason vs Religion - Nadeem_Walayat
3.The BrExit War, Game Theory Strategy for What UK Should Do to Win - Nadeem_Walayat
4.Goldman Sachs Backing A Copper Boom In 2017 - OilPrice_Com
5.Trump to Fire 50 US Cruise Missiles To Erase Syrian Chemical Attack Air Base, China Next? - Nadeem_Walayat
6.US Stock Market Consolidation Time - Rambus_Chartology
7.Stock Market Investors Stupid is as Stupid Goes - James_Quinn
8.Gold in Fed Interest Rate Hike Cycles- Zeal_LLC
9.The BrExit War - Britain Intelligence Super Power Covert War With the EU - Nadeem_Walayat
10.Marc Faber: Euro to Strengthen, Dollar to Weaken, Gold and Emerging Markets to Outperform - MoneyMetals
Last 7 days
Bifurcated US Stock Market - 29th Apr 17
Damn the Deficits, Huge Trump Tax Cuts Ahead! - 29th Apr 17
Gold Hostage to Stocks - 29th Apr 17
Warren Buffett Hates Gold… But Here’s Five Reasons You Need To Own It - 29th Apr 17
Stock Market Sentiment, Re-Fueled Along the Way - 28th Apr 17
Calling out the Central Bankers - 28th Apr 17
Fed's Third Inetrest Rate Hike and Gold - 28th Apr 17
USD/CAD - Invalidation of Breakout or Further Rally? - 28th Apr 17
What Happened to the Stock Market Crash Experts Were Predicting - 28th Apr 17
Earth Overshoot Day - Human Population Growth - 28th Apr 17
Misunderstanding GDXJ: Why It’s Actually Great News For Junior Miners - 28th Apr 17
What Makes Bitcoin Casinos So Remarkable? - 28th Apr 17
Financial Markets Improvised Explosives - 27th Apr 17
More Stock Market Short-Term Uncertainty As Stocks Get Close To Record High - 27th Apr 17
Elliott Wave Theory: Is Elliott’s Theory Enough? - 27th Apr 17
Billionaire Investor Paul Tudor Jones Says Stock Market Valuation Is “Terrifying” And He Is Right - 26th Apr 17
The Great BrExit Divides - Britain, USA and France - 26th Apr 17
10 Facts That Show Our Taxes Are Worse Than You Thought - 26th Apr 17
What Trump’s Next 100 Days Will Look Like - 26th Apr 17
G20: SURPASSING THE 2nd GLOBAL STEEL CRISIS - 26th Apr 17
What A War With North Korea Would Look Like - 25th Apr 17
Pensions Are On The Way Out But Retirement Funds Are Not Working Either - 25th Apr 17
Frank Holmes : Gold Could Hit $1,500 in 2017 Amid Imbalances & Weak Supply - 25th Apr 17
3 Reasons Why “Spring Forward, Fall Back” Also Applies To Gold - 25th Apr 17
SPX may be Aiming at the Cycle Top Resistance - 25th Apr 17
Walmart Stock Extending Higher - Elliott Wave Trend Forecast - 25th Apr 17
Google Panics and KILLS YouTube to Appease Mainstream Media and Corporate Advertisers - 25th Apr 17
Gold Price Is 1% Shy of Ripping Higher - 25th Apr 17
Exchange-Traded Funds Make Decisions Easy - 25th Apr 17
Trump Is Among The Institutionally Weakest National Leaders In The World - 25th Apr 17
3 Maps That Explain the Geopolitics of Nuclear Weapons - 25th Apr 17
Risk on Stock Market French Election Euphoria - 24th Apr 17
Fear Campaign Against Americans Continues Nuclear Attack Drills in New York City - 24th Apr 17
Is the Stock Market Bounce Over? - 24th Apr 17
This Could Be One Of the Biggest Winners Of The Electric Car Boom - 24th Apr 17
Le Pen Shifts Political Landscape- The Rise of New French Gaullism  - 24th Apr 17
IMF Says Austerity Is Over - Surplus or Stimulus - 24th Apr 17
EURUSD at a Critical Point in Wave Structure - 23rd Apr 17
Stock Market Grand Super Cycle Overview While SPX Correction Continues - 23rd Apr 17
Robert Prechter Talks About Elliott Waves and His New Book - 23rd Apr 17
Le Pen, Melenchon French Election Stock, Bond and Euro Markets Crash - 22nd Apr 17
Why You Are Not An Investor - 22nd Apr 17
Gold Price Upleg Momentum Building - 22nd Apr 17
Why Now Gold and Silver Precious Metals? - 22nd Apr 17
4 Maps That Signal Central Asia Is at Risk of War - 22nd Apr 17
5 Key Steps For A Comfortable Retirement From Former Wall Street Trader - 22nd Apr 17

Market Oracle FREE Newsletter

Why 95% of Traders Fail

Consensus Macro Trades Stop Out: Gold Has Made A Near Term Top

Commodities / Gold and Silver 2016 Feb 15, 2016 - 12:27 PM GMT

By: Sam_Kirtley

Commodities

Macro consensus trades into 2016 have not worked well, at all. This week saw a large flush out in positioning across financial markets. There are three consensus trades that we feel have been particularly squeezed and what we believe was a final clearout of these position sent other assets, such as gold, to extreme levels that present a number of trading opportunities.


The Fed Will Hike, Others Will Not

This was the premise of most consensus trades into 2016. Whilst the market was not convinced that Yellen was going to increase rates as much as the dot plot suggested, hikes were expected nonetheless. This dynamic shaped a number of trade ideas into 2016 across asset classes. We were not convinced of such hikes, which we wrote about extensively in late December, based a widening of credit spreads seeing real borrowing costs increase, reducing the need for hikes. However we did not anticipate that the market would so vigorously discount all chances of any hikes this year.

Equities – Financial Stocks To Outperform

In the stock market there was a view that banking stocks would outperform the wider index this year. An increase in the Fed Funds Rate would improve margins and see financial stocks outperform other sectors. This consensus trade has been doubly hit.

Firstly, the Fed hikes have not come, and expectations of them coming any time soon are near zero. Secondly, the widening in credit spreads that we highlighted in December have spread across a number of sectors. What began as a few energy companies struggling with a collapse in oil prices, flowed on to other materials and mining companies, selling fuelling more selling, and eventually leading to credit concerns at some major European banks.

Currencies – USD To Strengthen

In sympathy with the view that “the Fed will hike, others will not” were major bets that the USD would continue to strengthen versus other major currencies. In no pair was this consensus view stronger and positioning larger than in USD/JPY.

The vicious gold spike mid-week was mainly caused by a weakening of the US dollar versus the Yen. A consensus trade going into 2016 was that the US dollar would strengthen compared to the Yen, given that the BoJ was loosening monetary policy while the Fed was hiking rates. This view was turbocharged with the BoJ announcing negative rates not so long ago. However, this trade has been proven wrong, as the US dollar has in fact fallen considerably against the Yen.

With many exiting this trade, after being proved wrong, the market moved too far. This has pushed USDJPY notably below the US dollar index as a whole. Thus the US dollar has been dragged lower, which has pushed gold higher.

Bonds – Prices To Fall As Fed Hikes

As yields rise, bond prices fall. With many expecting a number of Fed hikes this year, investors sold bonds expecting prices to fall. As Fed hikes appeared less and less likely, investor’s scrambled to buy bonds and this has fuelled a major rally. As a result, bonds priced out almost all chance of a rate hike in the next 12 months and gold consequently soared. The pricing for future rate hikes has now returned to less extreme levels with bonds falling back from their rally mid-week.

However, gold has not followed bonds lower, which means the metal is likely to fall from here. Bond pricing currently implies that gold should now be around $1190, which is approximately a $50 decline from the close on Friday.

Consensus Trade Stopping Sends Gold Too High, Too Fast

We believe gold has now come too far, too fast. The scramble to stop out of the macro consensus trades so far this year has sent gold on its biggest rally in recent years. The largest of bounces in gold since the peak in 2011 prior to the current was following the end of the bull market and the break in April 2013. The current bounce has moved marginally higher than this in percentage terms.

Other technical factors also show gold to be too high. The RSI finished the week at 82.13, but on Thursday moved to the highest level since the peak in August 2011, when the Eurozone was on the brink of collapse and the Fed was engaging in massive QE. Even in these massively bullish conditions gold still sold off after the RSI approached 90. Therefore it is highly likely that gold will be sold off in the near term. The next $50 move in gold is lower.

Mining Stocks Getting Giddy

Just as we are of the view that gold has come too far too fast, mining stocks have done the same if not more. We do not think this move is sustainable. A spike in spot gold does not magically remedy many of the underlying issues that gold mining companies face. We are particularly wary of companies with debt that need to be rolled over in a poor credit environment. We have touched on some of the detail with our subscribers this week and intend to cover this in a dedicated article for publication shortly.

Trading Strategy

Having held the view for all of 2016 that there was minimal risk of a fall in gold prices we now have the opposite view. Gold will not fall to re-test the lows, but the next $50 move is down, and our positioning reflects that view. We are positioning for a bounce in general stocks, but a drop in gold miners. It’s been a rough and rocky ride this month, but that only creates trading opportunities and in this environment we believe options are key to limiting downside and optimizing risk-reward dynamics.To see our full trading record and for more information about subscribing 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

© 2005-2016 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