Featured in our Trading Club, 4th July: Receive Lex’s full analysis of equities, currencies and commodity markets FIRST at www.lexvandam.com.
In the past two weeks I have shared with you how Lex and I analyse and trade the US dollar and S&P 500 Whilst we spend most of our time looking at equities and currencies, we believe that one should not neglect gold when it comes to constructing your portfolio. This week we will look at the checklist we use to analyse gold.
For many people, gold is one of the most misunderstood assets out there. It certainly has fervent fans and critics in equal measure. Perhaps only Donald Trump compares in terms of polarising opinion. But ultimately, as traders and investors, what we are interested in is whether we can make money either buying or selling gold, or should put our money to work elsewhere.
Let's go through the same process that enabled us to spot the opportunity to buy gold ahead of the rally in the first half of 2016. Despite the consensus calling for a lower gold price at the time, the checklist that Lex and I present in our monthly Trading Club suggested otherwise, and our experience told us to follow this over the noise of other opinions. Fast-forward to today and gold is around 16% higher, although it has failed to reclaim the $1300 level seen last year.
ETF Flows. We also like to look at whats happening in ETFs. Like it or not, ETF flows are an important driver of asset prices in todays markets. In the case of gold we are looking for any divergence between the spot gold price and a widely traded Exchange Traded Fund which tracks gold. Currently this is neutral as there is no divergence, indicating that things are behaving normally. (0)
Futures positioning. We view speculative positioning as contrarians. Presently the net position is in the middle of the recent range and pretty much unchanged on the previous month. No directional signal here either. (0)
Options positioning. Lex and I also look at the options market for clues. Although it is unusual to derive a contrarian signal from the options market if the futures position is not at an extreme, when you do see them it can be very insightful. For now though, whilst the risk reversal indicates a preference for upside bets, it is far from extreme and basically neutral, at least for now. (0)
Short interest. Here’s where it gets exciting this month! Short interest in the gold miners has EXPLODED higher in recent weeks. This is not only a clear positive for contrarian gold investors, but also something that I want to do some further research in to. Even though there was no pessimism (let alone extreme pessimism) in the futures and options components on our checklist, when stock investors are suddenly making record short bets in shares of related mining companies, it tells me that there may be an opportunity coming. (+1)
Overall, we arrive at a total score of +2 for gold heading in to July. Whilst technical analysts may say that the chart looks pretty negative, the our checklist suggests that gold bears may be caught short by the bull case captured in our objective and robust trading process. “All that glitters”, may in fact be gold.
By following our process you can ensure that you are on the right side of the market and prepared to take advantage of any opportunities to trade gold this month. Join myself and Lex at the Academy to learn more and apply this same process to stocks, currencies and other commodities.
Have a great week trading,
Join James Helliwell and Lex van Dam and receive a full analysis of equities, currencies and commodity markets each month as a Trading Club member at www.lexvandam.com.