Best of the Week
Most Popular
1.Crude Oil Price Trend Forecast 2016 Update - Nadeem_Walayat
2.Will Deutsche Bank Crash The Global Stock Market? - Clif_Droke
3.Gold Price In Excess Of $8000 While US Dollar Collapses - Hubert_Moolman
4.BrExit UK Economic Collapse Evaporates, GDP Forecasts for 2016 and 2017 - Nadeem_Walayat
5.Gold Stocks Massive Price Correction - Zeal_LLC
6.Stock Market Predicts Donald Trump Victory - Austin_Galt
7.Next Financial Crisis Will be Far Worse than 2008/09 - Chris_Vermeulen
8.The Gold To Housing Ratio As A Valuation Indicator - Dan_Amerman
9.GDXJ Gold Stocks - A Diamond in the Rough - Rambus_Chartology
10.Gold Boom! End Game Nears As Central Banks Buying Up Gold Mining Companies! - Jeff_Berwick
Last 7 days
Here’s Why You Should Be in Cash Right Now - 28th Sept 16
The Fed Put a 50% Tax on Your Retirement Plan - 28th Sept 16
Massive Chinese Debt And Why They Are On A Gold Buying Binge! - 28th Sept 16
Stocks Commodities and FX Markets Waiting Technically While Fundamental Data Neutral Poised - 28th Sept 16
This Commodity Has Perked Up its Investors' Portfolios - 27th Sept 16
Charting the Continuing Gold Market Correction - 27th Sept 16
Stock Market Crash and Recession Indicator Warning: Extreme Danger Ahead - 27th Sept 16
Financial Markets and FX Setups 27th Sept - 27th Sept 16
Crude Oil, Forex and Stock Market Trend Forecasts - 27th Sept 16
Why There is Trump - 27th Sept 16
Save Up to 70% in Shopping Expenses for Daily Items - 27th Sept 16
Gold’s Moving Averages and Long-Term Outlook - 26th Sept 16
September Stock Market - The Not So Silent Demise of Deutsche Bank - 26th Sept 16
SPX sell signal confirmed - 26th Sept 16
SPX is testing the next level of support - 26th Sept 16
Outrageously Entertaining US Presidential Campaign Final Stages - What Happens Next? - 26th Sept 16
BoJ, FOMC and Where To Now? - 26th Sept 16
Stock Market New All Time Highs Next - 26th Sept 16
Why Trump Will Win US General Election 2016 Prediction Forecast - 26th Sept 16
Martial Law Rolls Out Across the US As Jubilee Nears - 26th Sept 16
Stock Market More Correction Likely - 25th Sept 16
US Presidential Election Forecast 2016 - Trump Riding BrExit Wave into the White House - 25th Sept 16
US Economy GDP Growth Estimates in Free-Fall: FRBNY Nowcast 2.26% Q3, 1.22% Q4 - 24th Sept 16
Gold and Gold Stocks Corrective Action Continues Despite Dovish Federal Reserve - 24th Sept 16
Global Bonds: Why Our Analyst Says Things Just Got "Monumental" - 24th Sept 16
Where Did All the Money Go? - 23rd Sept 16
Pension Shortfalls Could Be 4X To 7X Greater Than Reported - 23rd Sept 16
Gold Unleashed by the Fed - 23rd Sept 16
Gold around U.S Presidential Elections - 23rd Sept 16
Here’s Why Eastern Europe Is Doomed - 23rd Sept 16
Nasdaq NDX 100 Big Cap Tech Breakout ? - 23rd Sept 16
The Implications of the Italian Banking Crisis Could Be Disastrous - 22nd Sept 16
TwinLakes Theme Park Summer Super 6 FREE Return Entry for Real? - 21st Sept 16
Has the Silver Bullet Run Out of Fire Power? - 21st Sept 16
Frack Sand: The Unsung Hero Of The OPEC Oil War - 21st Sept 16
What’s Happening With Gold? - 21st Sept 16
Gold vs. Stocks and Commodities, Pre-FOMC - 20th Sept 16
BrExit UK Inflation CPI, RPI Forecast 2016, 2017 - 20th Sept 16
European banks may be more important than the Fed this week - 20th Sept 16
Gold, Silver, Stocks and Bonds Grand Ascension or Great Collapse? - 20th Sept 16
Mass Psychology in Action; Instead of Selling Gilead it is Time to Take a Closer Look - 20th Sept 16
Hillary - Finally Well Deserved Recognition for Deplorables - 20th Sept 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Power of the Wave Principle

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