Perma_Pig

029. Metallic Mean Reversion: Long Gold/Short Copper

AMEX:CPER   United States Copper Index Fund ETV
Well, well, well.. what an interesting setup we have here in the realm of the metals. It seems that confusion regarding inflation may have caused price overshoots in different directions for different metals. Two of such that glare out to me are Gold and Copper .

I will structure the write-up of this Pig-Play a bit differently this time due to the inherent complexity of this trade, and more importantly because either half of this strangle can be taken successfully, in and of itself. While I find this particular situation to be blatantly weird (and thus near-technical arbitrage), either commodity is trading so far away from its respective mean that both plays should work wonders individually.

Henceforth, while I recommend taking both plays simultaneously, I will outline each in different sections - in case one mean reversion is enough for you.

LONG GOLD ( GLD ):

As the chart suggests, Gold and its major ETF , GLD , have been consolidating in a comical fashion for too many months. In fact, I decided to perform a little accounting to determine what the fair price of Gold is after the most recent trillion-dollar stimulus print. The calculation and subsequent "should be" price are as follows:

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Data as of February 2021:

USD in Circulation: 21.0006 Trillion United States (Monopoly) Dollars
(https://www.quandl.com/data/FRED/CURRCIR...)

Troy Ounces of Gold Mined: ~147.30 Million Troy Ounces
(https://www.gold.org/about-gold/gold-fac...)
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Data as of March 2021:

USD in Circulation: 21.0006 T + 1.9 T = 22.9006 Trillion USD; Post-Biden Print

Troy Ounces of Gold Mined: ~147.30 M + ~0 = 147.30 Million Troy Ounces; Essentially Unchanged
(https://www.commonsensemath.com/marketis...)
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Gold USD/OZ Today: 1736 $/oz

"Should Be" Price of Gold Post-Print: 22.9006 Trillion USD/147.30 Million Ounces = 3285.93 $/oz
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In conclusion, based on hard data, simple math, and basic accounting principles, Gold should be recognized at 3285.93 USD per troy ounce by the market and all of its participants.

Yet, after the stimulus announcement, the price of Gold did not, in fact, immediately jump to over 3k/oz. No, instead it decreased and (hopefully) bottomed below 1700.oz. That, my piggish friends, is called fucking stupidity.

In final conclusion, Gold is due for a mean reversion to around 1850ish in the near term, so its ETF , GLD , should get to around 175.00 in no time. See the chart for entry and two profit taking points.

GLD PIG SPECS:

Buy Long Calls: 164 Strike, 4/16/2021 Expiration

Reasoning: Extreme likelihood of mean reversion back to 175 that has not been recognized by the options market yet. The proof is in the pricing: 164 Strike is relatively the same price as 167-169, so its 3 extra dollars of free delta in your pocket.
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SHORT COPPER ( CPER ):

I will not be performing any basic calculations for this one. In opposition to Gold , and mostly for extreme oversold conditions, Copper has ripped higher in a straight line for many weeks now (this market is so fucked up these days). The degree to which Copper , and other such earth metals, have had deeply depressed prices for several years is something akin to statistical impossibility. Frankly, they have been quite manipulated downward a la futures short selling, but I will not lecture about this today. Bottom line is that Copper's run upward is, in my opinion, purely technical rebalancing.

As with all things market-related these days, it overshot the mean by a country mile. Thus, the chart suggests that a very simple and predictable C-Wave down should be expected to begin in the next session or two. Since the dollars/share to the downside is pretty limited for this trade, I'd stick with at the money puts for a short flip. See the chart for entry/exits and below for Pig Specs:

CPER PIG SPECS:

Buy Long Puts: 25 Strike, 04/09/2021 Expiration

OR

Short Equity Directly at 24.83/Share

Reasoning: Chart says it all, but the one factor that should illicit confidence is the purely technical, precise nature of this move down. It also provides same-week expiration opportunities such that I am actually recommending purchasing put contracts that are slightly in the money.
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The cool parts about doing both of these trades simultaneously are:

1) You get a high probability of profiting in both directions;
2) Both commodities often travel in the same direction because both are metals that negatively correlate with dollar strength, all else equal. This means that you get a natural hedge baked in;
3) Due to general, market-wide idiocy, both metals have been severely oversold (bought) to the point where each basically must mean revert to some extent during the same timeframe;
4) The precise nature of the Copper trade allows for a slight calendar strangle as a final cherry on top.

I don't know about you, but I feel even more convinced after doing so much simple math. In any case, it should be clear that the commodities market is offering up opportunities while the stock market isn't and I intend to exploit it piggishly.

-PigFourAccountant


OANDA:XAUUSD
TVC:GOLD
AMEX:GLD
MCX:GOLD1!
MCX:COPPER1!
AMEX:CPER
AMEX:GLD
Trade active: Alright, this trade took some patience, but we may finally have at least our gold entry today above 163.68.

The key to this entry is price support/stabilization above 163.68 and that will be much more easily sustained with a higher open above 164.

It will then be a matter of sniping contracts on the second pull back towards that same 163.68 price area. The first pullback will confirm whether to enter or not, and that will be based on how firm the support is.

Since crypto looks to be faking the whole world out today, best keep an eye on gold for the real bull market in 2021.

Short copper at convenience.
Trade active: Apologies if you lost on the copper short. The GLD long should more than offset any loss incurred.

Its not a good idea to fight this apparently enormous inflation trade right now. I would stick to longing GLD outright, no hedge.
Trade active: Took half off gold @ the profit target.

There is a slight chance that I enter into a copper short if Dow sells off - the chart is setting up the same way it did when I made the play. Still would be careful of inflation talk and much simpler to just short Dow, long Gold instead.

Perma_Pig