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Days Away | Gold, Silver, Dollar, Yen | Weekend Report | 11th-12th March 2017

Days Away | Gold, Silver, Dollar, Yen | Weekend Report | 11th-12th March 2017

This weekend report will be broken into sections and mainly revolves around the direction of gold in both U.S and Australian dollars as well as the direction of gold miners.

There are numerous factors to consider, however I’ll focus on a few to hopefully shed some light on where the market is at.

Merchant’s Trading Insight

Managing risk is only important if a trade goes against you. The only problem is, most traders, especially retail traders like you and me, are programmed to assume that it only applies to “risky stocks”, certainly not the equities that you and I are trading/ investing in. The outcome is usually this: when it does happen to you, it will most likely damage your capital so badly that it would take years of successful trading to make up your losses that potentially could have been avoided with a few smart strategies in place.

And it’s not just “penny dreadfuls” that require risk management.

Remember when BHP had the dam disaster and halved in value? It could happen to you.

In fact, it would be wise to assume it will happen to you, a few times, over your trading career.

 

So let us assume that it’s a time bomb and that at some stage, one of the stocks you’ve bought:

  • will be sold short with momentum
  • will go into a trading halt
  • will raise capital and dilute its shares
  • will have bad news of some sort
  • will have bad news in its industry
  • will be sued for something
  • will be under investigation
  • will have a safety incident
  • will have disappointing results
  • will make a cycle low and knock out stops
  • will have a major shareholder exit the stock
  • etc etc etc etc etc etc

How do we manage risk then to ensure we don’t get taken down with the company’s share price?

Concisely:

  • Spread your risk across a few companies
  • Spread your risk across a few sectors ( I hardly every do this)
  • enter at bargain, opportunity and buffer levels
  • Use stop losses at levels that save you from strong support breaks
  • When in doubt, reduce your position size
  • Appreciate cash and the potential options it offers
  • Never marry a stock, no matter what
  • Try to make the most money, in the least amount of time
  • Avoid a conspiracy mindset
  • Banding together with fellow holders for comfort but being blind to price action
  • Not reacting to bad news (“it will be ok” and sinking with the ship. Why trade long in bad news?)
  • Try to avoid stocks that have zero revenue or zero profit
  • Be prepared to take a small loss before it turns into a large, inexcusable loss.

Heck, there are many other ways to be smart and sustainable in your trading.

These are just a few points for your benefit. Discuss them, use them, don’t use them.

Gold’s Rate Hike Historical Price Action | Timeline Perspective

I thought it prudent to look closer at the only rate hikes that have occurred in the last decade. You’d notice that in both occasions prior, there are bounces and sell offs, before and after the rate hike.

In 2015, the day prior and two days after, gold was severely punished:

gold interest rate hike Fed

In 2016 December, the day prior and 3-4 days after, gold suffered the low of its cycle:

gold interest rate hike Fed

Looking at both 2015 and 2016, there were green candle days 2,3,6 and 8 days prior (roughly)

Friday past, which gave us a green candle, would be day 4 prior to the expected rate hike.

This is not an exact science since we only have 2 rate hikes to sample from. It could certainly be different this time.

However, it is worth noting that people never change and that people are trading the markets. Therefore I would assume, with some reservation, that the day of the rate hike is usually a good day for short sellers to profit from gold and to take that profit the next day.

Strategic thought: I’m cash right now. It would make sense to enter on the low of the interest rate hike or 2-3 days later if history repeats itself. Stop losses can be set just a few percent below as a worthwhile risk  vs reward reversal trade.

GDX (Gold Miner Price action)

The last two rate hikes have caused sell offs and gap downs on previous rate hikes, even when there was a green candle bounce a few days prior.GDX GOLD MINERS

GDX is up over 2.5% and GDXJ over 5% on Friday’s trading. Bear in mind that if history repeats itself, the bottom does not usually occur before the rate hike. It usually happens on or after the rate hike. However, 2 rate hikes are barely hard and fast data to predict the future from. We may have bottomed on Thurs/Friday, but there is no way of telling.

Therefore, as I said before, trading the individual stock would be a better approach, based on its support and price action.

Gold

Gold touched $1192+- but recovered back into the trading box, resting at $1204.32 (XAUUSD).

Is this a fake bounce? Who knows?!

I will shortly touch on the other factors that could determine the direction of Gold…such as Bond Yields, the Yen and Euro.

But first…

Australian Gold Price

Australian gold is also right at support on a bear flag (which often means lowers prices are coming unless it is a failed bear flag). Breaking below $1590 will create a sell signal. Trading above $1640 will be a buy signal. However, waiting for $1640 AUD would be to miss out on most of the gains.

Rather, employing a reversal strategy would be more effective so that if it goes lower one would get bombed out, but a rally testing $1640 AUD would be gained in case AUD gold rallies.

Keep in mind, that while the sentiment from GDX in the USA will create some buying in Australia, the Australian gold price is not yet in a bounce. This could potentially be a great entry point. No way to predict, so parcelling in would be better, in case we do get the gap down on rate hike day.  So we could enter Monday, for instance, and take the risk of a sell off or gap down.

Doesn’t sound great to me, but could be profitable. Again, what is the support on your stock?

For instance BLK is around 49c-50c ,EVN is $1.90, MOY is around 24.5c…RMS is around 52c…. The supports are strong, but again, any support can be broken when panic sets it.

Unfortunately I cannot say what is going to happen. All I can share with you is the broader picture and hope it assists you to wade through the waters with more confidence.

U.S Dollar (DXY)

The dollar appears to have had a profit taking event. It did not, however, break any supports etc. It could be that traders jumped ship in case the Fed fails to raise rates…. Kind of taking some off the table just in case…

If this is all that happened, then the dollar will be heading higher. However, if the dollar falls below 101 on and after the rate hike, then Gold is going to bust the door down. I’m leaning toward to the stronger U.S Dollar camp because, the Fed will gain its credibility back. If it raises twice, then what stops it from raising 3 or 4 times this year? Especially if the stock market doesn’t seem to mind. It could cause a major rally in the U.S Dollar and another panic sell in gold. However, the bigger picture is that every rate hike increases the probability of economic and financial disaster. So If Gold sells of on this rate hike, I am very confident it would not be long lasting. Personally I would love a sell off in Gold because I believe it would be based on pure emotion. I also believe a sell off in gold will be a rare opportunity to buy at discounted rates while the market remains oblivious to the background trend: inflation, instability and financial sector risk+disappointment.

But we don’t always get what we want and we need to trade what we have, not what our dreamy, perfect ideal scenario is: this means I can’t also sit on the sidelines while gold rallies, wishing its demise to suit my entry. 6 weeks ago I publicly announced my exit and waited for a better entry point. There are better entry points now with a lower risk attached and that should be respected.

Keep in mind, that if the Aussie gold miners happen to open 2%-5% higher..(yes I would have missed out…not ideal)… but entering 2%-5% may not be the best strategy. The low of the day should be targeted. That could be on opening or it could be mid day. That is if you were inclined to take the risk before the 15th March.

Now, as I said before in last week’s post, there are Dutch Elections and Debt ceiling worries (could have caused the dollar drop too), so the trade is not without its potential reward.

What were the drops in the gold miners during the last two rate hikes? 8.5% and 12%. If that’s still to come then roughly one could risk a 10% drawdown if gold doesn’t turn more bearish. Alternatively, maybe this time it’s no different and one should wait for the market process the hike.

 

YEN (USDJPY)

Then broke above 115 but didn’t hold. Trading below 114.50 will be good for gold, but staying above 114.50 could mean that the Yen is heading to 116+.

For both the Yen and the USD, it appears that they have simply pulled back on profit taking, but are still heading in directions that bode poorly for gold. Unless the Yen strengthens and the Dollar weakens more, Gold will lose this support level of $1200USD.

The Euro

The Euro weakened, but not enough to sustain a breakout. If the Euro enters back into the trading box, the Dollar is bound to strengthen again, sending gold downward. If the Euro continues to rally, holding above the red line, then the case for gold above $1200USD becomes more positive.

Euro

Bond Yields

Gold regained $1200 USD when Bond Yields pulled back.
However, if bond yields are simply testing support, then they will bounce, causing gold to weaken.

In the bigger picture, if Bond Yields continue to go higher, it will create havoc in the economy. The Fed will need to regain control by buying bonds, which means they need to print more money. Ultimately, Gold is the winner, but it may not be apparent at first.

I think I’ve made a fairly comprehensive case on the factors influencing gold.

You will need to decide whether it’s worth catching the bottom (which may not be the bottom) or whether you’re going to let it go until things become clearer.

If the miners open at similar levers to where they closed, I may be interested in a short term trade. However, I may not be prepared to stay in overnight, 2 days away from the third rate hike  in about a decade.

___

Have  I missed anything? Leave a comment below.

|the Merchant

P.S after 2 hours, I really thunk I need to start charging for this… :p

16 Comments

  1. the Speculator

    Another great weekly report, thanks.

    “And it’s not just “penny dreadfuls” that require risk management.”

    BAL and SGH come to mind!

    Reply
  2. Matthew Butler

    Absolute ‘gold ueiin this article Jack! Thank you. I see Dave Morgan is also now bearish based on record shorts on silver and gold commitment of traders…. maybe a double bottom…. I’m completely out now. Too big a risk I feel….

    Reply
  3. Boudicca

    Thanks Jack for taking the time to answer those questions, really appreciate it. In relation to your answer to 5, wouldn’t it be in the interest for the Elite and central banks to drive the gold price down so as they can have more time to accumulate and at a lower price?

    Reply
    • the Merchant

      Thanks Boudicca. In relation to #5. Yes my sentiment entirely. However I believe there are limits as to what can be done in the timeframe available. Inflation reports are heading up for Europe and the US. So I don’t think we’d see sub $1050. Ever again. So not a bear market in my opinion. Though , with endless money supply who knows what could happen. However. If the market starts trading inflation then gold is going up and will do so rapidly.

      Reply
      • Boudicca

        Many thanks again Jack.

        Reply
        • the Merchant

          No worries. 👍🏻Thanks for the support and interest.

          Reply
  4. Boudicca

    Hey Jack,

    Thanks for a very comprehensive analysis! I have a couple of questions. 1) The last two hikes were 25 basis points each, I take it you are assuming 25 next week as well? 2) How likely is a hike above 25 basis pts? ( A bigger hike would certainly change the dynamics of your analysis). 3) Can anything in the announcement indicate that another hike is quite likely in June / July? This would also change the dynamics. 4) The time gap between 1st & 2nd hikes is about 4 times the gap between the 2nd & 3rd hikes. Will the difference in time gap be a factor in determining the timing and duration of Au’s subsequent correction? 5) The magnitude of the subsequent rise after each hike in Au’s price is less, do you expect it to be the same this time? (ie the rise will not exceed the recent high of $1262).
    6) Au is still in a bear market, the Fed has stated an intention to raise rates three times in 2017 and you are saying that the third rate rise will be in a decade. Are you implying that you expect at most another rise in 2017?

    Please remember that I barely know / understand the basics of technical analysis.

    Reply
    • the Merchant

      I love those questions. I will answer them over a few comments. 1. Yes. The assumption is .25. That’s because the Fed is keeping the stock market afloat and wouldn’t risk popping this record high unnecessarily. 2. Very unlikely. It will scare the market and they’d lose control being called unpredictable.

      Reply
    • the Merchant

      A bigger change would catch the entire market off guard. Gold will likely rise even more aggressively with anything higher than .25.

      Reply
    • the Merchant

      4. They’re expecting 4 rate hikes this year. So part of the issue is how the market will perceive this. As discussed in the report, once Fed raises, they will get back their credibility. So if they say 4 times, the market will listen. This may be bad for Gold initially but gold’s trajectory is up. Each rate hike makes the market more overvalued and more risky.

      Reply
    • the Merchant

      4. Yes. The rally after the rate hike was due in part to the one and done mindset. You could buy into he low of gold because it would be 1: months until the next hike. However that bet is about to fall off the horse. So, as discussed in the New Years resolution , it will be more important from now on to trade more aggressively as the predictability is out of he market. Especially since the stock market is unable to correct thanks to the PPT and the Fed. Why go for gold when the stock market doesn’t adhere to gravity? But when the market does correct, gold will be the “go to” haven. Not bitcoin. Not the Yen. But gold and silver.

      Reply
    • the Merchant

      5. I think that gold is in a long term accumulation. Central banks are repatriating gold for a reason. I think it’s in the Elite interest not to have gold appreciate before they are ready. Previously i drew a triangle for gold. Unless there is chaos such as falling markets , I think the gains will be tempered for now. The rallying stock market is the main reason Gold is trading like a currency.

      Reply
    • the Merchant

      6. I wouldn’t say gold is in a bear market unless it falls below $1050 roughly. It may make a double bottom. It may make a drawn out consolidation. But I do think the bear market is over in terms of the economic environment. Gold will soon be the only thing not losing value. And that time is coming soon. Inflation which has been missing for so long is coming out in a bull market of its own. Keep your eye on the TIPS auctions which are inflation protected bonds.

      Reply
    • the Merchant

      B) if they successfully pull this rate hike off. I would say there is at least another hike by year’s end waiting in the queue. That’s because the Fed is powerless without the ability to cut rates. They need higher rates asap to cut them. Ridiculous but true. And they may need to cut them soon. Alternatively they will start asset purchases again to keep everything shiny and functional. Aka QE4. In this event gold is going to $1500USD +++. Over time though. I think volatility is going to make a comeback soon. Long VIX is by a bad trade.

      Reply
    • the Merchant

      *long VIX is Not a bad trade. (Mobile )

      Reply

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