Gold Breaks Through $1500 Again, Buoying Hopes
While round numbers such as $1500 really isn’t that big of a deal, breaking trendlines certainly can be. Gold prices are looking like they are getting ready to move up again.
You don’t see many people get excited about the price of gold going down, even though we can make plenty of money when it goes down as well as up. It is true that gold has been exposed to a bias to the long side for a lot longer than stocks have, dating back to early civilization, far before anyone even got the idea to bet on something going down.
When gold goes up in price though, people sure get excited, and this buzz is starting once again after it corrected off of its early September high of $1560. Some serious money was made from the three-month rally that it was in at the time and we ended up seeing about $100 an ounce of profit taking in the aftermath.
When big names in the industry such as Blackstone’s Byron Wein speaks on gold, people’s ears perk up, and even when he says very little, this can get people excited. All Wein said was to “watch gold” in 2020, without even suggesting how much it could go up or even that it might, but that was enough to not only make the news but to generate quite a bit of excitement it seems. When this happens on a day when gold breaks through $1500 again, the stars might even be thought to align a little.
Before we get too excited though, we need to be aware of some basic realities surrounding commodities. Commodities are not something that you speculate on in the same way as you would with a stock. People still try to do this though and have expectations of upward biases that just keep going and going, like we do see with stocks, and think that all they need to do is to see the sky pretty blue right now and then just jump on this bucking bronco and hang on.
Commodity investing, if we can even call it investing, presents opportunities of a more situational nature, where sometimes it’s good to look to ride it up when it is moving that way and down when that’s the overall direction it is taking. If you don’t like to time your investments, it is a mistake to even dabble in commodities, including gold, although we are free to make as many mistakes as we want provided that we are able to withstand the losses that this incurs.
The folks that did well from this summertime rally are the ones that were in it for the rally itself, even though there are plenty who have hung on through the pullback. Depending on where they entered, they are still up, unless you got on late in the move and in that case, you have paid a price.
We usually can chase stocks pretty much all we want since they go up a lot overall over time, but gold is different and generally does not sustain big rallies. There are exceptions to this, but we need to look at the totality of the effect of a strategy, and when ours only works once in a while, once in a while cannot be relied on.
The goal with commodity trading is to do your best to seek to be on the right side of the trend, and this has little to do with anything other than the trading itself. Due to the volatility of gold, we also need to ensure that our time frames are ones suitable to the trading of the asset, which may or not fit our preferences, but when our preferences don’t match and we act on them anyway, we suffer.
Contrast this with stocks, where we can pick any time frame we want and still have a good expectation of success. Trading gold well is not about how long you like to hold things, aside from confining yourself to staying within the limitations of the moves, it is that any good strategy is going to have a shelf life and we need to be paying attention to this if we want to do well trading it.
If there are questions of fit, it surely can’t be that the gold market needs to fit us better. If we even thought of fit, we should be able to easily spot our failures with this, but this doesn’t happen when you put on a blindfold and refuse to take it off.
If we are serious about wanting to trade a commodity like gold and are out to at least try to get this right, we need to be willing to jettison our biases, such as preferring that something go up rather than down or preferring to hold something for an amount of time that is decided by us arbitrarily rather than letting the asset decide such things, as it is correct to do with commodities.
Gold Does Not Go Up Like Stocks Do
You can get away without paying attention to these things with stocks, but gold is a different animal and must be approached differently. Plenty of people get lucky as well as unlucky with holding gold, but if we are depending on luck to succeed, we’re better off placing our bets where luck is much more on our side, like with stocks, rather than the more neutral longer-term expectations of a commodity.
So many people like to speculate on where something like gold may be in the future, the next year for instance which is what is in the news now, but this cannot be left to mere guesses as so many like to see it as. If we insist on guessing, once again, we will do much better guessing with the odds a lot more in our favor like they are with stocks.
This does not mean that gold does not provide some good opportunities sometimes, and right now may indeed be a good time to have a look at it. We never should be looking at an investment in isolation though, as we need to always strive to do our best to have our money in the right places according to current expectations.
A lot of people think that it somehow is good to have a certain amount of money just parked in something like gold to look to at least potentially dilute the effect of the downside of our stock positions, to diversify in other words with an investment that is not that well correlated to stocks. It is true that when the stock market turns bearish, people do flee and this at times can boost the price of gold, but we need to ask ourselves if this is the case now. If it is not, we need to ask why we would want to put a plan in place that is currently wrong just because it might turn out to be the way to go in the future.
We need to be engaged with our alternative investments as well, and assess their desirability depending on the circumstances, which involves both ensuring that we have a positive expectation now and that positive expectation is greater than its alternatives.
This makes it tougher to justify holding gold during stock bull markets, but this still has its place and time. Gold hasn’t had the punch to take on stocks lately though, and even if you were trading it during its summer rally, you would have to wait until it broke out enough, or otherwise, you’d be placing a kind of trade that doesn’t work out and loses money on balance, with all the false starts that we see with this.
This doesn’t mean that we could not have made money, but if you look at where the stock market went during this time, it would have bested even good entries and exits with this gold trade. This one worked out much better than average, and if you try this move over time, you will become much more disappointed overall when your move loses money while the stock market chugs.
If we are tossing such a significant rally, as far as gold goes anyway, we do need to ask ourselves what sort of move that it would take to make this a worthwhile proposition, and as long as the stock market is moving up the way it has, this sort of opportunity just isn’t likely to come around.
The thing with gold is that it is both not reliable on the upside like stocks are, and also is harder to predict. It’s not that stocks are that easy to predict, but when things are moving ahead, the odds of this continuing are generally high enough to want to be in them. With gold, it’s anyone’s guess where it is headed, and it is much more like Bitcoin than stocks are.
Stocks are at least pretty well connected to the outside world, insofar as earnings and expectations of earnings do drive prices. Market supply and demand does shape stocks quite a bit as well, but the demand is connected to these future expectations of growth. Bitcoin and other digital currencies are the product of pure market supply and demand with no such expectations, and gold is pretty close to that as the fundamental demand for it doesn’t really affect its price much.
This makes trading gold riskier than stocks, and we have to discount any visions we have of where it might go because the chances of being disappointed are higher. Both stocks and gold broke out this year, but with gold, we can look at its current move and wonder whether or not it will even reach where it was during the summer in 2020, where hardly anyone expects stocks not to make some new highs at some point next year.
Gold Actually Does Look a Little Tempting Here
Accounting for all of this, we can now look at how gold looks to decide whether or not we may want to buy it here or hold it if we are already in. The chart does look a little bullish here, with the trend of lower highs and lower lows just being broken to the upside. The fact that it also has broken $1500 doesn’t hurt, and this move actually looks like a pretty decent one right now.
The plan here would be to set your stop a little below where this move actually broke out, which gives us at least some wiggle room but not see this take us beyond the point where we could say that the trade was failing. If you buy it on the basis of it continuing to move toward the highs of early September, and it stalls to the point where you can’t say it’s breaking out anymore, our hanging on to it is asking for us to be broken instead.
If we’re trading GLD, the SPDR Gold EFT, this means that we enter at around $141 with our stop at $139 and the next real resistance point at $146. The way we make real money with this trade isn’t if it stops at $146 again, even though we can exit close to this line for a decent amount of profit, we are hoping that it keeps going and will slow down considerably higher than this, which could very well happen if enough people jump on this bandwagon.
The previous move was worth $26, the one we’re looking to climb back to, but with a move of this size, pressure to take profits will kick in more. With our now smaller distance to this top, traders will be less eager to get out and even though this is a real point of resistance, the thirst for more that won’t be quite so quenched may be enough to push it through this point this time.
It is important to have the upside larger than the downside, and in this case, we are risking $2 to potentially make $5 or more, and the more part needs to be factored in as well, so we can say that the ratio here is a good one. This is something investors do not consider even though it’s just as important to them, but keep in mind that we are not investing here and investing in gold is in itself always a mistake as it simply is not reliable longer term like stocks tend to be.
We wouldn’t really normally want to play this particular chart move, but the key to this particular one is all the press that gold is getting right now, and it’s the additional chance that this might put some air beneath our feet and make the trade less likely to stop out that is the key to this. Gold normally trades too choppy to be able to rely very much on $2 stops with this EFT or the equivalent if you are trading gold futures and look to hold it long enough to put a scare into the 2019 high, but this extra potential buoyancy does serve to shine up the play.
This is still not that exciting of a trade, but if you do feel the need to own some gold, you are certainly better off playing it the right way instead of the blind man’s bluff that is so popular with gold investors. Gold does have some real cliffs and we need to keep our eyes forward and break our fall when we should.
As for its 2020 outlook, anyone who tells you that they have anywhere near a good enough idea of where it is headed this long out to put money on it is either a psychic or a fool. Even if the psychic is that good, we’d want to see real proof before we put money on the line. The threshold isn’t even about being right, it’s about being right enough. That’s the real challenge with gold, and it’s a big one.
We need to pick our spots and should never commit to anything this unreliable and unpredictable for anywhere near that long. Traders take things day by day, and if we really do wish to trade a commodity, we need to do the same. Gold trading is much closer to a zero sum game than stocks, which means that poor decisions will tend to be punished a lot more than with assets that a chimp could manage to get at least good returns with.
Someone will therefore be taking your money when you mess this up, whether you are investing or trading in it, and especially if you are investing, since they are willing to lose more. The fact that this ETF is only up 11% since August of 2016 also shows that we don’t need to lose money to lose out, given that the S&P 500 is up 48% over the same period. This extra 37% over 3 1/3 years does make a big difference, so if we want to mix in some gold trading, we need to pay close attention to striking when the iron is hot, and as we can see, in a bull stock market, it mostly runs a lot colder.
The iron is at least heating up a little again now, which includes this recent hype, and as we move forward in 2020, we need to continually monitor its temperature if we wish to become the craftsman that this task does require.
Editor, MarketReview.com
Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.
Contact Monica: monica@marketreview.com
Topics of interest: News & updates from the Office of the Comptroller of the Currency, Forex, Bullion, Taxation & more.