Futures For YouQ&A
Futures For YouInside The Futures World
Want to find out how the futures markets really work? Carley Garner is the senior strategist for DeCarley Trading, a division of Zaner Group, where she also works as a broker. She authors widely distributed e-newsletters; for your free subscription, visit www.DeCarleyTrading.com. Her books, Currency Trading in the Forex and Futures Markets, A Trader’s First Book on Commodities, and Commodity Options, were published by FT Press. To submit a question, post your question at https://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C.
IS GOLD STILL SHINING?
Gold has dramatically underperformed recently. Is this the new norm?
The truth is, there is nothing normal about markets or trading them. The current environment encompasses market sentiment and volatility levels, but tomorrow could be dramatically different. Accordingly, what you assume to be the norm won’t necessarily carry into the future.
Since posting an all-time-high in September 2011 near $1,900, the asset class once revered as a safe haven has been tearing holes in investment portfolios. Just as traders and investors were willing to jump on gold’s bullish bandwagon, the speculative community has turned on the yellow metal with vengeance. Nonetheless, at the precise time gold felt most bullish a few years ago was the exact time it was topping out. We feel like the eventual bottom in gold will feel the same; the moment in which the bulls are desperate for relief and the bears are salivating for yet another new low will be the point at which a magnificent price reversal will be possible. At the time of this writing, we were assuming this scenario would be looming within the July time frame. Once the tides turn, the pain felt by the latecomer sellers, or simply market chasers, will be fierce.
If you’ve been reading this column over the years, or have followed our newsletters, webinars, or other commentary, you are likely aware that we are not necessarily believers in the gold story. We are quick to remind investors that gold has its limitations as an investment product. It doesn’t pay a dividend or a coupon payment, and, aside from the value humans place on it, it isn’t worth much. After all, it is too soft of a metal to be used for most industrial purposes. If it weren’t for our obsession with history and the gold standard, it would be just another element on the periodic table. Even so, when it comes to the financial markets, perception often goes much further than reality does. Accordingly, we feel as though speculators will eventually fall back in love with the idea of hedging inflation and economic risk with gold.
If it weren’t for our obsession with the gold standard, gold would be just another element on the periodic table.The economy has been slowly recovering for years but has yet to show real signs of strength. Investors, and thus the markets, will be sure to question the equity market rally from time to time; this too will work in favor of the bullish gold case.
Similarly, although we’ve yet to see any evidence of inflation in the data, we can’t help but feel it will soon be a concern. Don’t forget, if traders simply expect inflation, they will react accordingly. Whether we actually feel the price pressure is almost irrelevant; just the discussion of it is enough to flip the markets. If you don’t believe me, look at a Treasury chart. The market collapsed in May 2013 on the first hint of the Fed possibly tightening its purse strings, yet the central bank continues to buy the securities in full force. In other words, in the financial markets, sometimes words actually do speak louder than actions. Aside from our personal opinions on the value of gold, the market could move with investor sentiment changes, and gold may perhaps, once again, be off to the races.
To reiterate, we aren’t stating that gold is some sort of safe haven or inflation hedge, because history suggests that it isn’t. All we are saying is that humans are destined to repeat cycles and we rarely learn from our exuberant mistakes. If we are correct, gold bulls will soon be rushing back to their favorite speculation.
Please keep in mind that gold is a treacherous market and is not for the risk averse. In the futures markets, most position traders are likely best sticking to the emicro contracts that allow for easy dollar-cost averaging and buy & hold opportunities for small traders. An emicro future is one-tenth the size of the original contract; a trader makes or loses $10 per dollar of movement in the price of gold. Trust me, this is enough exposure for most small retail traders.