Unlike most other commodities, precious metals have less to do with supply and demand and more to do with macro-economics. In today’s markets, gold and silver are less industrial commodities and more financial instruments.
But they are also an integral part of a balanced commodity option selling portfolio. In addition, they are great markets for taking premium. Which is why this month’s feature in gold is so important. It’s a market that’s been largely out of the news – primarily because of it’s slow, discouraging (to bulls) descent. Media hate covering markets like that. But for option sellers, it can be an ideal situation.
The Gold in Gold Bugs
The great thing about gold for option sellers is that there will always be gold bugs. No matter what the markets do, what the economy is like, what the geo-political situation, to gold bugs, it’s always a good time to be buying gold. Companies that peddle gold coins and gold bullion do a good job of convincing the public of this idea.
Gold typically performs best in times of inflation or a weak dollar. It can also be a safe haven investment in times of uncertainty. The keyword here is can be.
Many will argue we are in times of great uncertainty. Maybe so. But one thing not uncertain is the strength of the dollar.
And while global investors used to flock to gold in times of anxiety, this time around, they’re flocking to US treasuries and the US Dollar for safety. This puts further pressure on gold.
Gold bugs, however, disregard this reality. This “always bullish” mentality is what keeps healthy premium in gold calls available much of the time.
While the rest of the world struggles with stagnant or slowing growth and outright recession and acts to add stimulus to their economies, the US is expected to raise interest rates this month.
The US recovery, while sloppy and underwhelming, has still been enough to make us the best of the worst vs the rest of the world. Thus, the dollar has strengthened against other major currencies.
The markets have been expecting the Fed to raise rates for months now. The fact that it hasn’t happened yet has not hampered the dollar’s ascent. Some argue that the Fed actually pulling the trigger this month could be a case of buy the rumor, sell the fact.
We don’t think so. While a rate increase could bring some profit taking from dollar longs, it’s hard to see a US rate increase as anything but longer term bullish for the dollar. Should the Fed back off in December, the expectation will likely be for the increase to come in early 16.’. Thus, either way, the longer term forces driving the dollar don’t look to reverse dramatically any time soon.
The US economy is expected to grow by 2.8% in 2016 while inflation is projected to rise only slightly to 2.3% by end of 2016 as opposed to a paltry 1.2% for 2015 (*source: Kiplingers.com). This does not paint an inflationary environment for gold.
Trend still your Friend
Dollar bears argue that the market could be approaching a top. But the global economy doesn’t suggest so much.
US Dollar (Monthly)
US Dollar monthly chart is displaying a classic “cup and handle” formation.
Nor does the monthly chart.
The monthly US dollar chart (above) seems to be reflecting a classic William O’Neil “cup and handle” formation. If Mr. O’Neil’s forecasting model is correct, a substantial move higher in the dollar could be on the way.
Solid Downtrend in Gold
The end result of Dollar strength and the global “risk off” vibe towards asset purchases? A stubborn downtrend in gold since 2012. And while limited rallies are to be expected, this overall trend seems likely to continue.