|
Fed monetary policy has
been the most significant driver of gold prices over recent years, and US
employment data has been the main driver of Fed policy. Therefore the
release of US Non-Farm Payroll data is hugely significant for gold investors
and Friday’s release was no exception. We have been bearish on gold prices
for all of 2013 and as a result our model portfolio is up nearly 60% year to
date. However, there a couple of factors that are causing us to consider the
possibility of a significant rally in gold prices towards the end of the
year. Whilst our core view is that gold prices will head lower, we see a risk
that softer employment data and delay of QE tapering triggers a rally in gold
over the coming months.
Let us start by taking a look at most recent set of employment data that
was released on Friday. Total nonfarm payroll employment increased by 162,000
in July, which was below expectations and saw a rally in US bonds and gold
prices spiking higher. In addition to this the change in total nonfarm
payroll employment for May was revised from +195,000 to +176,000, and the
change for June was revised from +195,000 to +188,000. Although the most
recent number missed expectations and we saw some backward revisions, we must
keep the big picture in mind. Over the last year nonfarm employment growth
has averaged 189,000 per month, much to the satisfaction of Bernanke.
It is this consistent growth that has caused the idea of tapering to be
put on the table. Remember that the Fed is not concerned so much with one off
sets of data, but more with the overall trend. As the chart below shows, the
three month average employment gain has been solid recently.
The strength in the US economy has no doubt removes any chance of
additional QE in the foreseeable future, therefore talk of gold challenging
its all-time highs any time soon is premature. However, the street expects
the Fed to begin tapering in September, which is now little over a month
away. Should we get another soft employment print before then, then there
will be pressure on the Fed to delay tapering, at least for a month or two,
to ensure that the data is not turning.
Gaining 150k of jobs each month is still good progress and 7.4%
unemployment is much better than it has been; but 7.4% is still a high
unemployment rate and therefore the Fed will be biased to urge on the side of
caution when pulling back on their QE programs. The recovery is still fragile
and there is a significant risk that the Fed moves to remove monetary
stimulus too soon, whereas there is very little downside in waiting another
month or two before tapering.
However, should the Fed postpone tapering in September, the market will
overreact and view this as a dovish move from the Fed. For the gold market
some traders may incorrectly presume that this means tapering is off the
table, QE is back on and gold prices are going back to their old highs. The
buying of gold that a delay in tapering could spark would cause a minor
rally, which could gain steam given that we are approaching a seasonally
strong time for the yellow metal.
The period from September to January has been the time when gold has
performed the most over the last decade. Granted, the last decade was a bull
market which we are arguably no longer in, but even so, we feel this could be
a driver of a relief rally in gold – even if all it does is increase bullish
sentiment.
Technically speaking, the $1350 resistance level held for gold this week
and we would not expect gold prices to rise up through that level unless
tapering was delayed or US economic data took a turn for the worse.
We would also note that the MACD appears ready to make a bearish
crossover, and the RSI is weakening with room to fall down to the 30 level.
Gold is still in a downtrend, with lower highs, ($1650, $1600, $1480, $1350)
and lower lows ($1550, $1350, $1200).
If we had to put some rough probabilities on the next moves in gold, we
would say there is at 90% chance that the next $300 move in gold is down, but
only a 65% chance that the next $100 move is down. Given our estimate of a
one in three chance that gold can rally $100 from here, patience is the order
of the day. Rallies in gold should be gradually faded, but short positions
should not be taken with too much aggression. We still prefer a core short position
on gold, as the chances of gold going below $1000 in the next six months are
better than 50-50.
We are closing our subscriber service to new customers this week due to an
excess of demand, but we are keeping our positions nimble and preparing to
carefully manage our risk over the next month. Risk-reward dynamics are our
main focus with every trade we make, this approach has generated a 727%
increase in our model portfolio since inception, and we are simply pointing
out that at this stage the risk-reward dynamics are still in favour of being
short gold - but they are not as strong as they have been previously
this year. As such our short positions are not as aggressive as they have
been.
However, if US data remains strong, and the Fed push ahead with tapering
then gold prices are only going south. Shorting gold at any level above $1000
is a good trade in that scenario. However, under any scenario we still do not
see the value in buying gold mining stocks. All will fail to deliver on the
massive investor expectations that have been built up over a decade of
constantly rising gold prices. Many will struggle to meet event the reduced
expectations and we have no doubt some will be forced out of business
completely.
Do not be fooled by the recent dead cat bounce in gold stocks, the chart
below shows the true picture.
The relief rally has run out of steam above 250 on the HUI and it is our
view that we will see 150 before 350. Therefore we would not be holding any
gold stocks whatsoever and even though we are not holding any short positions
on this sector currently, we are looking at shorting a select few miners that
we feel are particularly vulnerable. Visit www.skoptionstrading.com to find
out more information how you can sign up to receive such trading signals and
our model portfolio, but please be advised that we are closing the service to
new customers after this week due to excessive demand.
In conclusion we are still bearish on gold, but concede there is a risk of
a rally back in the latter part of 2013. Therefore, whilst we maintain a core
short position on gold, this position is not as aggressive has trades we have
held previously this year when then risk-reward dynamics were more in favour
of being short gold and we acted aggressively, banking triple digit returns
using put options. We will be monitoring the situation closely over the
coming weeks and adjusting our model portfolio accordingly. Best of the luck
out there.
Subscribe for 6 months- $499
Subscribe for 12 months- $799
|
