Let's start by looking at a chart of gold in 2017 and working our way out into a bigger picture view.
For reference sake, this chart shows the spike high (spike of green on the far left in the chart) around 1330 in November of 2016. This marked the high made on election night when the polls began to indicate that Trump would be the winner. Initially this was seen as bullish for gold, but as readers may remember, that had all flipped by settlement the next day. Gold gave up all the gains of election day, dropping some ~$200 from that high to the lows made at end of 2016/early 2017 around 1125. This was the low for 2017, and it was never retested.
2017 was a challenging year for prop shops and market-makers alike. Prop shops, who aim to outperform major indices (and charge fees) NEED volatility in markets to differentiate performance. After four years of trading gold as a market maker, I decided to close all of my positions in October 2017, just before the following chart's price action. I am quite confident I would've lost money trying to trade such a stagnant market.
Above is a chart of just under 2 months of price action in gold (October-December 2017). Notice that the bulk of trading over this period took place between 1270 and 1295, a $25 range. $25 represents ~2% of the price of gold at these levels. When a commodity is trading in a 2% range for two month, you are living the definition of low volatility. I do not have the official numbers, but can confidently say that in 2017 the implied volatility (price of options) in gold reached their low for at least the last decade. The lower the volatility goes, the more exposed traders with limited capital are to blow out risk (forced liquidation) when playing from the short option side. Large institutional players can martingale (double down on selling options) their way out of these situations should movement pick up, but small market makers and prop groups are essentially forced to be long options and hope for the best. As I believe has been the case for a few years running, there are fewer market participants (on the options side) now than at the beginning of the year.
But while gold may have had numerous sloth-like trading periods in 2017, the chart continues to be constructive for further price appreciation.
Take a look at the weekly chart going back to April of 2013. Keep 2 things in mind.
1) notice how well defined the downtrend is
2)The importance of the 1305 area
You can see how starting in April 2013 (left of the chart) gold fell into a very well defined down trend lasting until the beginning of 2016. I have written about this downtrend in detail in past posts. The most important takeaway for now is that gold was in a downtrend for years, and that trend broke in Feb 2016.
Here is a closer look at that downtrend
Notice the White Circle. This is the Final rejection of buyers solidifying the downtrend before gold dropped 250 dollars to new lows. This white circled area took place around 1300. You will notice that there is a lot of consolidation around this 1300 area from 2013 until demarcated high in early 2015. Since 1300 established itself as a sell zone, any break and established trading above it would re-enforce the flip to the 1300 level as strong SUPPORT. At the very right of the chart above you will see that gold broke this downtrend in Feb 2016. Let's look at the price action from the end of the multi-year down trend in Feb 2016 until now.
Here is a look at the weekly chart in gold going back to late 2015
Notice The white arrow. This is an incredibly significant point on the chart. The line that runs from left to right through it is the Multi-year down trend line.
Were gold to have fallen lower here, The whole long term picture changes. The breakout in Feb 2016 would look like a failure. When resistance is broken, it should act as support if retested in a rising market. This also happens to be the low for 2017.
To recap 2017. It was a year that gold had a convincing hold at an important point of support on the long term chart. It spent the year consolidating but managing to grind higher and finish the year at a significant point of long term resistance (1305).
Notice that gold is making higher highs, and higher lows. It appears that we have a reasonably well defined up trend forming. The rally here at the end of 2017 showed convincing buying that helps re-establish the lower line up this uptrend as strong support.
These trend lines are approximate, but the demand we saw at #3 reinforces the notion that this lower line is attracting buyers. We have an intermediate term uptrend (1 year) coming into long term resistance. I would argue the 1280-1300 level has served as an important level for nearly a decade (see below)
If gold is able to hold above this 1300 level and turn it into support, I believe the likelihood of range expansion is greater.
I have put forth my views and perception of gold's price action throughout this post, but I could be right or wrong. Let's just say there is a 50% chance I'm right and 50% chance I'm wrong. Is gold worth buying?
To answer this we have to consider our targets and stops relative to each other. This is where we can use our trend-lines to help us.
If we are betting on this uptrend maintaining itself into next year, knowing the speed of that trend is important for setting targets. If we believe this trend-line holds, our lowest target would be $1380.
The support line of the uptrend comes in around 1270, so it will be $1380 ($1270+$110)in one year.
Doing similar math for the uptrend, I think the high target would be somewhere near 1525-1550 depending on how you measure the line.
For time's sake let's just assume we are looking for 1380. It is a reasonable target as it been clear resistance since gold broke above 1200 in early 2016. So, if we bought around Friday's close
$1380-1305=$75 low target profit.
Where do we stop out?
If we use the current level of the support line in our uptrend (1270, which will increase ~ $10 a month) to stop out we would lose
1305-1270=$35 $75/$35 risk reward is decent, especially if you are looking for potentially higher targets. For those who want to widen stops, the low around $1240 is $65 below current levels. With this stop we aren't getting very favorable odds (though still better than 50/50), but we would not stop out until we were confident our thesis was wrong. Violation of the 1240 level would certainly mean that the uptrend concept has failed.
It is amazing to look back at this chart of gold (above) going back to 2010 and notice just how little time was spent between these two prices. $1380 has been formidable resistance, spoiling every upside breakout above 1300 since 2013. Above it however there has been very little price action. For the last few years, gold has remained congested within ranges that bring buyers and sellers to the table in tighter intervals. If gold were to break above 1380, there is not a lot in the way of chart resistance between it and that 1540 area.
Notice the white X where the downtrend began in 2013. This comes in around 1470. Retesting the level where the great downtrend (2013-2016) began would seem like a reasonable possibility, posing potential resistance.
Also worth keeping in mind as far as targets go is the 50% retracement from high to low since 2009. The 2011 high was ~1920 and the low at the end of 2015 was ~1050.
Predicting these prices with accuracy is hardly ever possible, but it is worth noting there are a fair number of things out there that support a positive picture for gold, should it break the 1380 tops. I like to look for trades where my bias aside, the price of my low target is more favorable than my stop out point. If you subscribe to the background evidence and logic I've put forth, then the potential kicker with this trade is that if it goes in your favor, there are reasons to believe it might continue to trend.
Admission of bias
I admit my personal upward bias towards gold being due in part to the thesis I had a few months back that gold would bottom out just after the December rate hike. For those paying attention, gold has done that the previous two years (2015 and 2016) making lows immediately following the rate hike and starting the year in buyers markets. The success that getting in front of those trades yielded early longs is not lost on me, and may influence my views a bit. Still, the higher high/lower low trend analysis speaks for itself outside of any historical bias I might be allowing to alter my view.
The name Fiat Gold was intended to be a bit paradoxical, highlighting the fact that gold has fixed quantities and fiat currencies do not. Because of its finite supply, gold is viewed as a store of value. Much of the wealth generation we have seen in the US has been due to the appreciation of the stock market. If gold is a store of value, and the stock market is the main driver of value creation, we should be able to get a sense of how the two might be priced relative to each other. What "fair value" is cannot be answered with any great confidence but I do think it is worth noting the relationship between the two over time.
The purple line represents gold (and the prices on the left). The main chart is of the S&P 500 with Prices on the right. Notice how the all time high in gold represented the greatest divergence between gold and the S&P. Now we see the greatest divergence in relative value since that gold high in 2011 the other way (Stocks more expensive now). If gold is a store of value, and so much of individual wealth generation has come from stock appreciation, it would stand to reason that gold would have positive headwinds. Gold could continue to stagnate and stocks could sell off as well. We can't predict those things, but it is worth noting that the two are diverging in price about as much as they have for the past 10 years.
For fun, here is a look at the two graphed over each other for the last 20 years on a monthly chart.
If anyone would like to discuss anything here further feel free to message me on Linkedin.
Best wishes to everyone for a happy and healthy 2018,