When looking for an ideal trade setup, we want to see Fundamental Catalysts, Extremes in Trader Positioning and/or Activity, as well as your preferred technical tools reaching a consensus. In Gold and Silver we are seeing all 3 factors converge to a Long Setup - And these same factors are pointing to a broad based commodity rally.
1) Without much fanfare, the PBOC has commenced liquidity injections during June, and unsurprisingly we have started to see base metals strength. Iron Ore, Zinc, Lead, Copper have rallied smartly over the past few weeks. The perceived appetite for commodities in China impacts inflation expectations, and this little noticed base metals rally indicates traders are starting to position for inflationary trades.
2) Specifically with Gold - while statistically speaking the Jun-July period is a coin-flip proposition, Aug-Sep exhibits very strong seasonal trends with Gold posting a 64% win rate going back to 1974. Indian Dealer gold stockpiling ahead of Diwali drives this, so we can anticipate strong physical demand from the East within the next 6 weeks.
3) The COT reports for Gold & Silver are showing a slightly bullishly leaning net position for commercials. However what has caught my attention is the Swap Dealer activity. I rank the COT participants Positioning and Weekly activity on a 18m and 5yr basis factoring in a volatility component along with their activity. Currently the Swap Dealers' Long Position scores 100% on a 18m basis, which tells us they are fully positioned for at minimum a intermediate Gold rally. When looking at price distribution, there is a significant statistical advantage when we see Swap Dealer Longs score 90% or higher in Gold. This setup has happened 83 times over the past 9 years. 70% of the time gold moved higher AT LEAST $30.44 over a 4 week period & $44.50 over an 8 week period. The 70th percentile draw-down was $13 & $18 respectively over the same time intervals. So you are looking at a better than 2-1 pot odds as well, and all Poker players know you take those bets all day long.
4) From a technical perspective you can see in the above Weekly chart that Gold rallied sharply out of the late 2015 lows & then spent 6months retracing that Impulsive Wave. The Key here is that it has made a Higher Low at the 1,120 level and we have been moving higher ever since.
Do you know what else has been moving higher since Dec 2015? If you guessed Interest Rates, you are correct!! While the FED has been raising rates Gold has been rallying (Gold's not supposed to do that, is it?!). And guess what the FED will continue to do over the next 6-18 months? Not only raise rates, but they will be tightening monetary conditions further by reducing their Balance Sheet. The FED will cause the next recession (like they have every other since the Cartel was established) by tightening monetary conditions too much. Fed tightening cycles almost always lead to recession. We are 9 years into this (very weak) economic expansion and now the FED is hellbent on withdrawing liquidity. We should be on the lookout for a stock market fall, which will then cause them to reverse course - Once they do & signal to the market that they erred & will start easing again, you will see the Gold rally kick into high gear.
So how to play this? As price ebbs and flows in unpredictable ways, both Longs & Shorts can make money in the short term - But my focus here is on the bigger picture, so here is the play.
1- Go Long Aug Futures
2 - Go Long the Dec17 1,250 Put
3 - Sell either the Dec17 1,350 or 1,400 call to reduce your cost of insurance.
This should cost you approx $20 for the hedge, or 2k per Trade Unit, with a R/R setup around 3-1.
I have to wait until tomm evening to see where the option prices are, so we'll finalize the trade economics then.
Thanks & Good Trading to all.
1) Without much fanfare, the PBOC has commenced liquidity injections during June, and unsurprisingly we have started to see base metals strength. Iron Ore, Zinc, Lead, Copper have rallied smartly over the past few weeks. The perceived appetite for commodities in China impacts inflation expectations, and this little noticed base metals rally indicates traders are starting to position for inflationary trades.
2) Specifically with Gold - while statistically speaking the Jun-July period is a coin-flip proposition, Aug-Sep exhibits very strong seasonal trends with Gold posting a 64% win rate going back to 1974. Indian Dealer gold stockpiling ahead of Diwali drives this, so we can anticipate strong physical demand from the East within the next 6 weeks.
3) The COT reports for Gold & Silver are showing a slightly bullishly leaning net position for commercials. However what has caught my attention is the Swap Dealer activity. I rank the COT participants Positioning and Weekly activity on a 18m and 5yr basis factoring in a volatility component along with their activity. Currently the Swap Dealers' Long Position scores 100% on a 18m basis, which tells us they are fully positioned for at minimum a intermediate Gold rally. When looking at price distribution, there is a significant statistical advantage when we see Swap Dealer Longs score 90% or higher in Gold. This setup has happened 83 times over the past 9 years. 70% of the time gold moved higher AT LEAST $30.44 over a 4 week period & $44.50 over an 8 week period. The 70th percentile draw-down was $13 & $18 respectively over the same time intervals. So you are looking at a better than 2-1 pot odds as well, and all Poker players know you take those bets all day long.
4) From a technical perspective you can see in the above Weekly chart that Gold rallied sharply out of the late 2015 lows & then spent 6months retracing that Impulsive Wave. The Key here is that it has made a Higher Low at the 1,120 level and we have been moving higher ever since.
Do you know what else has been moving higher since Dec 2015? If you guessed Interest Rates, you are correct!! While the FED has been raising rates Gold has been rallying (Gold's not supposed to do that, is it?!). And guess what the FED will continue to do over the next 6-18 months? Not only raise rates, but they will be tightening monetary conditions further by reducing their Balance Sheet. The FED will cause the next recession (like they have every other since the Cartel was established) by tightening monetary conditions too much. Fed tightening cycles almost always lead to recession. We are 9 years into this (very weak) economic expansion and now the FED is hellbent on withdrawing liquidity. We should be on the lookout for a stock market fall, which will then cause them to reverse course - Once they do & signal to the market that they erred & will start easing again, you will see the Gold rally kick into high gear.
So how to play this? As price ebbs and flows in unpredictable ways, both Longs & Shorts can make money in the short term - But my focus here is on the bigger picture, so here is the play.
1- Go Long Aug Futures
2 - Go Long the Dec17 1,250 Put
3 - Sell either the Dec17 1,350 or 1,400 call to reduce your cost of insurance.
This should cost you approx $20 for the hedge, or 2k per Trade Unit, with a R/R setup around 3-1.
I have to wait until tomm evening to see where the option prices are, so we'll finalize the trade economics then.
Thanks & Good Trading to all.
1 - Buy 1 Dec GC Future for 1,265.70
2 - Buy 1 Nov 1,250 Put for Debit (26.20) - expires 10/29
3 - Sell 1 Dec 1,400 Call for Credit 8.10
The net cost of the insurance is $18 - Meanwhile you have $134 of potential upside..
Max loss is the diff between your put strike and cost of the future which is 1265.70-1250 or $15.70 + $18 premium = $33.70 total Risk vs Reward of 134 - 33.70 = $100. Said another way, 3-1.
You can actually improve on the returns by scaling out of the hedge once Gold confirms a move through $1300. The Delta on the option is currently .41 so if Gold went there we could anticipate our $1,250 put still having value of approx $12. You would then use 1,300 as your mental stop.
The key here is that you are in a position with all odds in your favor, and you have 120 days to see it work. Your potential gain is $10k per contract. We will circle back in a few months to update the P&L on this trade.