Gold FuturesEducation
Is gold getting old? Trading like a Hedge Fund
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Featured in our AUGUST Trading Club
Our checklist provides a systematic process that fellow hedge fund managers and traders employ to analyse markets, from which the biggest trading decisions are made. We use similar versions to analyse major currencies, stock markets and other commodities such as crude oil 0.41% , and score each factor +1, -1 or 0 depending on whether they are regarded as positive, negative or neutral for the coming month. The total ranges from +7 to -7, with a positive score indicating a potential buy, and a negative score suggesting that you may look to sell (closing long positions or going short). Sometimes of course there will be a neutral total of 0 - which in itself can be valuable in protecting your P&L by avoiding trades when there is nothing to be done.
Excess liquidity. This is one of the best long run indicators for gold. For many years there has been positive ‘excess liquidity’ in the financial system, however this year the rate of change has been slowing, with the spread rolling over. The positive level is offset by disappointing momentum, and is awarded a neutral score. (0)
Real interest rate. This month, the combination of rising US rates and falling inflation (i.e. a rising real rate) is a very bearish signal for 'gold bugs’. (-1)
ETF Flows. There is negative divergence between the shares outstanding of the large physically-backed gold ETF and the spot metal price. This is another bearish omen for gold, and tends to occur fairly infrequently. Ideally we like to see ETF flows confirming the price action in the underlying market. (-1)
Futures positioning. Although longs have been unwound in the past month, in the context of the prevailing range over the past 10 years this is hardly extreme. On balance we regard this as neutral, but you could argue the case for a positive score over a very short term horizon. (0)
Options positioning. There hasn’t been a meaningful signal here at any time this year, with the relative demand for equivalent calls versus puts pretty much equal. If it were to advance higher then this would be considered negative for contrarians. (0)
Short interest. Last month saw a surge in short interest amongst related mining shares. This month we have seen the level of interest tick down slightly. If short interest is at an extreme, then it may indicate to us that equity market speculators are overly confident of an anticipated decline in gold (bullish for us). Whilst it remains elevated, the move down this month has in my opinion offset this, so we award a neutral score on the checklist. (0)
Seasonality. Finally, something to be optimistic about this month! August has in recent years been the next best month (after January) to own gold. However, this on its own wouldn’t be enough for us to be long - take for example the decline last August (-3%) and in 2008 (-9%). It goes to show why we dont trade anything in isolation and follow a comprehensive process in our trading to stack the odds further still in our favour. Still, this is a positive factor this month. (+1)
Overall, we arrive at a total score of -1 for gold heading in to August. This suggests switching to a negative bias in the precious metal during the coming month, following the +2 previously.
Regardless of whether you have ever traded gold, all markets are influenced by the factors captured in our gold checklist and investors in stocks, bonds and currencies are better informed with this insight. Join us at the Academy to stay on the right side of the market and apply this same process to stocks, currencies and other commodities with analysis from myself and Lex van Dam.
Learn with the Lex van Dam Trading Academy on TradingView! tradingview.com/edu/
Featured in our AUGUST Trading Club
Our checklist provides a systematic process that fellow hedge fund managers and traders employ to analyse markets, from which the biggest trading decisions are made. We use similar versions to analyse major currencies, stock markets and other commodities such as crude oil 0.41% , and score each factor +1, -1 or 0 depending on whether they are regarded as positive, negative or neutral for the coming month. The total ranges from +7 to -7, with a positive score indicating a potential buy, and a negative score suggesting that you may look to sell (closing long positions or going short). Sometimes of course there will be a neutral total of 0 - which in itself can be valuable in protecting your P&L by avoiding trades when there is nothing to be done.
Excess liquidity. This is one of the best long run indicators for gold. For many years there has been positive ‘excess liquidity’ in the financial system, however this year the rate of change has been slowing, with the spread rolling over. The positive level is offset by disappointing momentum, and is awarded a neutral score. (0)
Real interest rate. This month, the combination of rising US rates and falling inflation (i.e. a rising real rate) is a very bearish signal for 'gold bugs’. (-1)
ETF Flows. There is negative divergence between the shares outstanding of the large physically-backed gold ETF and the spot metal price. This is another bearish omen for gold, and tends to occur fairly infrequently. Ideally we like to see ETF flows confirming the price action in the underlying market. (-1)
Futures positioning. Although longs have been unwound in the past month, in the context of the prevailing range over the past 10 years this is hardly extreme. On balance we regard this as neutral, but you could argue the case for a positive score over a very short term horizon. (0)
Options positioning. There hasn’t been a meaningful signal here at any time this year, with the relative demand for equivalent calls versus puts pretty much equal. If it were to advance higher then this would be considered negative for contrarians. (0)
Short interest. Last month saw a surge in short interest amongst related mining shares. This month we have seen the level of interest tick down slightly. If short interest is at an extreme, then it may indicate to us that equity market speculators are overly confident of an anticipated decline in gold (bullish for us). Whilst it remains elevated, the move down this month has in my opinion offset this, so we award a neutral score on the checklist. (0)
Seasonality. Finally, something to be optimistic about this month! August has in recent years been the next best month (after January) to own gold. However, this on its own wouldn’t be enough for us to be long - take for example the decline last August (-3%) and in 2008 (-9%). It goes to show why we dont trade anything in isolation and follow a comprehensive process in our trading to stack the odds further still in our favour. Still, this is a positive factor this month. (+1)
Overall, we arrive at a total score of -1 for gold heading in to August. This suggests switching to a negative bias in the precious metal during the coming month, following the +2 previously.
Regardless of whether you have ever traded gold, all markets are influenced by the factors captured in our gold checklist and investors in stocks, bonds and currencies are better informed with this insight. Join us at the Academy to stay on the right side of the market and apply this same process to stocks, currencies and other commodities with analysis from myself and Lex van Dam.
Learn with the Lex van Dam Trading Academy on TradingView! tradingview.com/edu/
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