Seven years later, I am wondering similar things. Part of me will always be upset that my good friend Sean (who continues to be one of the best heads up online poker players in the world) and I didn't walk away from college as millionaire 22 year olds. We didn't.... but we could've.... Why didn't we?
Because we weren't willing to see the bigger picture in front of us. Poker, a pretty mathematical game on the lower skill level games, could've been exploited with just a little bit of work. At the time, I would've told you, we can't beat it..... and given you any number of excuses. I'm not mad at young Ben. But I realize that at the time, I over estimated the others out there.
Enough with the memories.... what does this have to do with gold?
Stop Over Estimating the people trading this market. There may be a ton of opportunity here. Gold continues to search for it's definition. Since gold has been confined to this range over the last 3 years (mainly between 1400 and 1130) it is easy to get lulled to sleep. But this is how cycles work. Periods of extended boring nothingness tend to be followed by more violent moves. Tracking shorter term trends in gold, you will notice that there are periods of extended slowness followed by quick pops and drops.
Above is a look at gold on the daily over the last 3 years. It has Essentially been creating smaller and smaller ranges. Notice how over time, specifically the last 6-8 months gold has done almost nothing. Many decide to look elsewhere. I think gold is 2-10 months away from being a very volatile commodity. I would say this is the quiet before the storm. So, the lack of interest in gold makes it all the more interesting. As a trader of the gold options market, I can tell you first hand there are not many participants in this market right now. When it actually moves for once (which it will) interest in the metal will re-emerge. As traders enter the market, people start trading more, and the market starts to be a real market.... but for now, its slow.
It's slow because speculators have realized that this commodity has had to consolidate for a while, and they will re-enter when the time is right. I believe that time is sooner than some might think, but funds know in a market like gold, it is better to wait until the break and then get on board than try to call the trend too early. The chart above should make that point pretty clearly.
As far as the short term chart goes, gold looks nothing short of terrible
I spoke in previous posts about how to maintain the uptrend, gold would need to settle at or above 1195 by June 15th. There has been very limited interest in rallying the metal. When solid volume sell orders come in, there are few buy orders coming in to fight back. What has been shocking to me is how slowly the sell off has been. I've said that I expected gold to trade down to 1140-1150 as soon as it broke 1175. Today, following a strong NFP, it is clear that I was wrong.... it didn't sell off so quickly.... but it didn't rally either. Options action would tell you people are not really betting on the downside, but options action hasn't been such a great indicator of direction on any medium-long term basis. So, gold doesn't move much, but the price action tells me we will either rip higher towards the broken trendline (1192) or slowly grind to 1150 and then we can re-evaluate.
The crazy thing from an options trading perspective is that implied volatility is about as low as its been over the last year. If gold were to go and retest 1130 (the low in the last few years) a break should technically lead to another 50-75 lower. In what looks like the middle of an established downtrend (assuming the lower line I've drawn is actually valid) gold should retest 1140-1150 in the next week or so, but it all seems to be happening very slowly.
For those looking to get involved in trading the precious metals, keep the following in mind.
1) Interest rates effect this stuff in ways that might not be obvious to us. Some people put trades on because it is so easy to leverage them.... if they are unable to get to same leverage in a higher interest rate environment, it could take a player out of the market.
2) The options buying in Comex Gold has all been in 2016. The differential in volatility (expectation of movement over the long term vs short term) between longer dated and shorter dated options has moved out in ways that has not been seen in a very long time in this market. SIMPLY PUT: People are paying to see movement after new years 2016 but not before.... so this may continue to be a choppy range.
3) Look for a reason to believe in a short or long that is more than technical. If you are good enough to trade direction in this market profitably (without working 24/7 and making a small return) let me know, because you are better than I am.
But the metal lacks an identity right now. Is it the dollar that matters? Is it rates? Is it a strong/weak stock market? I will give my opinions on these things in later posts.... but for now, no one's opinion matters. Gold is not a good long or short from a retail investor's perspective. It simply has some more work and soul searching to do. It may find its way soon, or the chop fest may continue. I promise to write about it if I see a sea change beginning.... but for now its quiet.
I'd be biased to the downside in the short term... but my best advice would be to stay away from putting on any directional bets through outrights. Options are cheap enough to make some defined-risk (pre determined max loss) bets on the metal.... but I would avoid buying/selling any purely directional products (futures/ etfs etc).
Conclusion: Don't let the low volatility make you forget that we are still near the low end of a multi year down trend. That being said, directional bets are far less EV (expected value) than bets on volatility over the next week or so. My concern is that gold could get stuck because there are no major economic releases Mon, Tue, Wed, Next week... and gold has not moved on non-eco news days lately.
Enough for now. Please comment if I have poorly explained anything and you want to give me a second shot.
-Ben
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