Trade alert - taking profit on gold
(For now)
I went long gold last November, with the view that gold would do well over the course of the next 6-12 months. However, thanks to the central bank of China going on a buying spree, a strong downtrend in USD, and seasonal demand for gold, this position has outperformed my expectations by moving over 10% within a short amount of time.
Sometimes when the market gives you a strong trending move without a commensurate move in the fundamentals, you should accept the gift and move on instead of getting greedy and hoping for more.
The strongest drivers of gold are real Treasury yields and the US dollar. Real yields have only moved modestly in favor of gold.
Yellow = gold, Blue = inverse of 10 yr real yields
Most of the move in gold has been driven by a strong downtrend in USD. However even against the DXY dollar index, gold has overshot a bit.
Yellow = gold, Blue = inverse of DXY dollar index
Gold is overbought on the daily RSI index. The indicator has a strong record of predicting counter-trend moves.
If I were a long-term investor averse to turning his positions every few weeks and months, I’d hold on to the position. However, the trader in me wants to take profit and wait for better levels to re-enter. While gold could certainly keep pushing higher on weaker inflation data and Fed pivot expectations, it’s getting vulnerable to a pullback.
From a fundamental perspective, PMIs around the world are turning higher, led by Asia and the China reopening. US forward-looking indicators are hooking higher as well, suggesting the recent bout of weak data is transitory. Employment in the US refuses to budget from its current tight levels. All this suggests that the Fed will not surprise to the dovish side anytime soon and is far away from cutting rates, despite inflation trending decisively lower. I previously was leaning toward the recession camp, but recent data point to the global economy remaining in a Goldilocks environment longer than I expected. More on this in my next post.
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