Right now, the best way to play Gold is to stay away

Summary:

  • Medium term algorithmic signals show a rebound:  Expect a re-test of $1300
  • Long term algorithmic signals say Sell
  • With no catalyst on the horizon to push Gold in either direction, it’s best to stick to the side lines

At Intellikon, we have no bias in any market.  We are not thrill seekers, and we only take short positions when the statistical probabilities favor it.  We also understand that market conditions are not always conducive to profits, and these are the are times when it is best to stand aside.

It is for these reasons why we are staying away from Gold in either direction… for now.  Here’s why:

On December 3rd 2013 we posted “The most accurate Gold price indicator we have seen yet (and it’s been bearish for months)” – This was a look at the correlation between a human-managed Canadian Resource mutual fund and the price of gold.  At that time, the NAV of the fund had tanked to new lows, but on December 30th when it broke above $8.00/unit we called for a possible bounce.

Since then, a Gold bounce did materialize with a rally to over $200/ounce up to a high of $1393 this month.   Unfortunately, the only ones able to capitalize on that bounce was the ‘fast money’ – intraday traders, options sellers/Market Makers, and high frequency traders – because $200 is all Gold could muster as it retraced 50% of the move to settle at $1293 last Friday.

To go Long Gold at this point we would need to see 3 major indicators turn bullish as outlined below, along with our ratings for each one:

1.  Our favorite Indicator:  First, our canary in a coalmine the DMP Resource Class fund:   NAVPU is currently at $9.06, indicating that the mass panic selling has subsided, but it could not get much above that key level.  If the fund drops below $9 into the $8 range and holds, we would consider this to be bearish, (Recall in our original post that these funds can potentially trade below fair value if mass redemptions occur), but for now we would simply consider this Indicator as “Not Bearish”
(Side Note:  after reading our negative post about the fund, the Fund company cut off our daily pricing updates.. this makes the trend more difficult to track, but we have other ways)

3.  Capital Flows:  Last quarter ending December 30, Bridgewater, the worlds largest hedge fund took new positions in some of the most recognized names in gold mining.  But their overall position in the sector – Basic Materials – pales in comparison to their position in other sectors such as Information Technology and Financials.  It’s the same story for the worlds largest Mutual Fund company, Vanguard, who actually reduced their positions in Gold miners.  This is clearly a vote in the direction of equities with a possible inflation hedge, but certainly not a play on currency or market disaster – a scenario that would be required to see Gold make new highs.   We rate this large fund accumulation Indicator as “Neutral”

4.  Intellikon Predictive Algorithms:  When we updated our post last December 30th we indicated a potential bounce in Gold, and a bounce we did get.  However we were waiting for our predictive algorithms to confirm that the long-term selling had fully subsided and a new up trend had developed.  This has not yet materialized.  As shown in the charts below, there are long-term continuous trading patterns going back at several years that show persistent Sell signals in Gold futures as well as the GLD (gold) and GDX (miners) Exchange Traded Funds.  Indicator : “Bearish”

Our predictive algorithmic signals for Gold in charts:

A Long-term Algorithmic Sell signal for GDX  (Gold Miners ETF)  has been in play for over a year…

GDX – Daily (click to enlarge)

The Algorithm generated a Buy signal for Gold Futures on Feb 13 – Expect a bounce back to re-test the $1300/20 level…

Gold Futures (click to enlarge)

The bounce in Gold futures may not become fully reflected in the GLD ETF, which the Algorithm said to Sell last week…

GLD Daily (click to enlarge)

 

But what about Fundamentals?

In our opinion, Gold has nearly no fundamental measure:  It is insurance you hope you never have to use…. a speculative hedge for inflation, or an outright currency collapse.  It is used as a store of wealth and can sometimes take the form of expensive jewelry and gifts.  There are ways to measure production and recycling and demand, but in the end, Gold is only worth as much as people feel it is worth.  Since feelings are fleeting, and people do not stock gold in their cupboards to consume, we can’t say that Gold has the same fundamentals as say Oil which drives the global economy.  This makes it difficult to predict the price of gold based on Fundamentals alone.  In 2011,  the trade of the year was to buy gold, but this was based on the Fed’s QE2 program which devalued the US Dollar and exposed a great imbalance between supply and demand.  Market distortions such as this are difficult to quantify, even more so today as the Fed unwinds their QE program.   Should QE be ramped up again, and in turn cause a shift in the sentiment among large money managers, only then would we incorporate fundamental elements into our positions.

What about the short term?

For the next few months Gold will likely be trend-less, trading within a range as it has done for the past year.  While short-term trading is not our style, we will be launching an algorithm which can capitalize on the sudden moves we have seen in the Gold futures contracts in the past several weeks.  The trading patterns that our algorithms have picked up are suitable for intraday traders and options players, and we will let our members know as soon as it is ready.

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The content contained in this blog represents the opinions of the authors who may or may not hold long or short positions in securities of various companies discussed in the blog based upon the authors' views. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied solely upon in making investment decisions, ever. It is intended for the entertainment of the reader, and the authors. In particular this blog is not directed for investment purposes at US Persons.
Posted in Gold, Public.

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