Historically Gold has performed +10-20% in the 6 months into US Presidential Election years AND also by longing Gold on this pull-back it opens up the opportunity to benefit from the potential tail risk that the UK votes to "Brexit" in which Gold will likely trade through $1400.
Gold is one of my favourite plays for 2016 for these reasons so I suggest a strategy of:
Buy GOLD - 1@1259 2@1237 3@1210 Long term TP $1395 SL $1195 Short term TP $1310 SL $1195
- Near-term on a UK Vote to stay we will likely see Gold risk-on sell off towards the $1200 handle - this is a great opp to get a good average price by buying Gold on its way down as I expect Gold to trade close to $1400 by years end and into the Election.
- A UK Vote Leave will put Gold close to the $1400 level within a week.
- The time-risk are asymmetrically skewed to the upside for Gold IMO as 1) in the near term, Brexit and Global economic unbalance uncertainty buoys the precious metal; Further, the recent failure of risk markets (SP/DJ) to set new highs despite posting recovery, likely signifies the end of the equity bull run, and thus the start of the Gold bull Run.
- and 2) The US FOMC Rate Hike Cycle, US Presidential election and wider Global Economic concerns of Deflation and low-growth which is a systemic issue and is also likely to be the case for the foreseeable future (with the 2nd and 3rd largest Central Banks - ECB and BOJ under pressure - among much of the developed world) all contribute to drive the increase in risk-off/ safe haven demand for Gold over the Long-Medium term.
- Gold is selling-off due to the increased risk appetite in the market currently as the near-term Brexit risk is soothed by "Stay" biased polls - HOWEVER, with Gold Volatility trading 50% lower than it was a week ago (reflecting the settled risk this week) with current ATM at 15%, and with 1M Risk-Reversals trading with a positive call skew of 3% we can expect an upward bias over the coming weeks/ months.
- As lower Implied Vols are projected across the 12m options curve and the 12m Futures curve is also trading contango which both imply the Gold market sentiment is for the price to rise.
- Finally, as the FOMC Rate hike cycle intensifies over the medium-term, bond prices will come under pressure, thus driving further demand for Gold as the higher quality and higher return asset is sought.
Comment
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PLUS we now have BREXIT risks which have materialised which is causing further macroeconomic uncertainty (world growth likely to be hit) - making Gold trade heavy on the buyside. Further, not to mention the UK in particular is unsurprisingly under alot of pressure as the FX markets plummet 10% and also as the political structure in the UK rallies in uncertainty with PM Cameron resigning whilst at the same time the 2nd biggest party (Labour) also undergo significant restructuring as their leader Corbyn comes under fire.
Thus all of which will help drive Gold up futher in the near term.
Not to mention, China growth and credit bubble worries, which have been a big macro risk-off theme for sometime, are continuing which in turn is supporting Gold buying also.
Personally at these levels it isnt great (from a 1259 perspective). However, both futures and options are trading well on the offer/call side indicating gold is expecting to rise. Also as I say in the post, gold historically outperforms in H2 of every election year cycle.
In my opinion, in the next 1-2wks we will see a reduction in risk-off assets as the Brexit headwinds subside somewhat (as PM Cameron delays the article 50 signing).. Also we are seeing risk recover (global stocks up and GBPUSD recovering) so i think Gold could fall a few % in the next 2 weeks, providing better entry at <1300.
deearcodes
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Thanks for the response. Really learning a lot from these insights.
eskgroup
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Agreed! Risk of 1183s still remains...watching DMA50/20/100 (near by) closely.
QuantumLogicTrading
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Yup but even at 1183 im buying gold, its just cheaper IMO.
An excited market after a "vote stay" could push us down to <1200 but not for long.