Thursday, September 29, 2016

Blueprint for swing trading gold to yearend

A lot of gold punters out there, getting awfully crowded. Apparently in a zirp universe, gold is the world’s savings account, too many presuppositions here and questionable premises. Gold bugs like to bring up the correlation with the dollar but that in reality holds little water when you look at the actual historical relationship.  Price is ultimately driven by demand, not by correlations.  Right now it's a fear driven trade, the fundamentals don’t back it up, the physical mkt is not as hot as the paper mkt, demand is actually contracting in india and china, in india the govt has been implementing controls to curb demand, sometimes these take time to filter through.

Additionally, the commercial hedgers, who tend to have an informational edge over the other mkt players aka dumb money, are at record short positions, while the specs are at record highs. These conflicting forces have kept gold at bay, spiraling in a sideways trajectory since July that will ultimately end in tears.  

My strategy is to buy put spreads on the leveraged gold products, the more leveraged the better, as these will see even greater velocity to the downside.  The problem is these products don’t have much of an options complex built around them, so rather than take what the mkt gives you, you gotta name your price which means the chance of fills is low.  Your edge is not only directional, but is further availed by the inherent dysfunctionality of these products.  These leveraged etf's reside in the far reaches of the liquidity spectrum for equities, where there’s little to no viable liquidity.   You’ll have to give the mm’s their pound of flesh but I do not recommend splitting the bid and offer or get hosed.  The vol premiums are high, so structure these as bear put spreads, going slight OTM for the long side so you'll rack up intrinsic quicker, and around 20 delta for the short leg.  Gold has been bumping up against the downward trendline setting for an ideal entry point for at least a pilot position.  As it’s coming off it again, there's been a build in call activity, a disaster waiting to happen, when the dip is bought as long as gold continues to precipitate downward. Can wait for confirmation of a break through the compression lows to size up with spreads.  No need to build the position out yet, stacking on risk while still in consolidation as the time decay continues to drain out of these junkers, but when you see gold on the cusp of the acceleration is the time to size up, that's when the trade moves onto the dancefloor.  

As for the market, i think it is setting up for a ripper of a ride, 2017 will likely mirror 2013.  Too many traders are all beared up.  We’ve been consolidating at the highs for over a year building up alot of bearish angst that i believe will ultimately get released in a bollinger blast to the upside.