We preface this article by stating that we are neither gold bears nor bulls. We are traders and we target trades with the best possible risk/reward dynamics, regardless of market direction. At the founding of our service, SK OptionTrader, we were bullish on the yellow metal and banked considerable profits as gold rallied to all-time highs. Beginning in 2013 we took a heavily bearish view, and again banked triple digit returns on gold as it declined. Now, we believe we have seen the lows and are preparing to get long gold once again.
Fear around the effects of China’s currency devaluation has led to turmoil in financial markets. Equities have sold off, bonds have rallied, and volatility has spiked. The medium term future of US monetary policy has been thrust into darkness as concerns around the economic outlook have risen rapidly.
As a result of the change in market dynamics we believe that gold has the potential for a sizable rallyfrom here and that there is the potential for gold to challenge both the medium and long term downtrend lines. This means that the medium term lows around $1050 are highly unlikely to be visited in the coming months and we intend to take full advantage of that.
Gold has failed to rally on key bearish events
Gold and US real rates have long held an inverse correlation. When rates were cut and the Fed embarked on massive QE, gold rallied to all-time highs. Once the Fed implemented QE3 the economic outlook improved. This meant that more QE would be unnecessary and that the current measures would be tapered off. While this took place gold fell back from its all-time highs, entering a bear market in April 2013.
In December 2015 the Fed raised interest rates for the first time since 2006. This began a new tightening cycle and was accompanied with overall hawkish sentiment and dot projections that indicated the Fed expected another 100 basis points of hikes would be required in 2016.
This was the most hawkish monetary policy since action taken in nearly a decade and should have been heavily bearish for gold. However, the yellow metal failed to break through support at $1050 and did not even challenge the longer term support level of $1030.
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