Fundamentals combined with its track record during recessions; Gold is set to outperform S&P 500 in 2023. S&P 500 faces uncertainty in the new year given higher rates for longer hurting both equities and bonds, nudging investors to alternative stores of value. Against that backdrop, this case study argues for a spread position of long Gold and short S&P 500 with an entry point at 0.466.
BULLISH GOLD DRIVERS
Falling Production: Gold production has been declining since 2019. Many gold miners have moved into battery metals and mineral resources. Miners have also reduced investments into exploration, making long-term supply anemic.
Shrinking Reserves: Gold Reserves held by the top ten miners have shrunk by 33% over the last decade. Quality of remaining reserves is also deteriorating.
Flight to Safety: Worsening global economic conditions has thrusted gold to emerge as a haven with flight to safety pushing gold demand up 28% this year as per World Economic Federation.
Central Banks Buying Binge: Central banks are on gold buying spree not seen since 1967. Ratio of central bank buying to total gold purchases is at a ten (10) year record. Central banks of China (32 tons), Turkey (31.17 tons) and India (17.46 tons) are amassing gold at record pace.
Impending US Recession: Recession fears are soaring. Although, Fed opines that the US could still narrowly miss a recession, the prospect of one seems likely. In recessions, gold has an impeccable track record of outperforming equities. Poly-crisis aggravates the urgency and flight to safety.
During the last four Fed tightening cycles from 1994 to 2015, gold typically underperforms in the six-months preceding the rate hiking phase. Post that, Gold tends to outperform both US equities and USD.
Higher Rates Devalues Equity and Bonds: When markets carry higher rates for longer, bonds and equities underperform. Investors with the classic 60-40 portfolios which are deeply underwater in 2022 will look to hedge with uncorrelated assets such as gold during recessions.
KEY TAKEWAYS FROM COT AND OPTIONS MARKET
Gold Net Longs Doubled: Over the last 12 weeks, institutional investors including hedge funds have substantially increased their net long positions in CME Gold Futures by 97.3%.
S&P 500 Shorts Up +6.7%: During the same period, CME E-mini S&P 500 futures have seen institutional traders (including hedge funds) increase their short positions by 6.7%.
S&P 500 Put-Call Ratio High: Ratio of number of puts to calls on US options exchanges touched 2.03x last week which is unprecedented since 2004. Typically averaging below 1, on one rare occasion has this ratio inched closer to 1.5x. Fear of a falling market is palpable. In other words, there are twice as many positions betting on US equity markets falling than rising.
GOLD TECHNICALS
Short-term moving average (20-day) recently intersected a falling Long-term moving average (200-day) suggesting a potential rally. Stochastic and RSI have moderated over the past week and appears neutral. Gold is testing its R1 pivot level. If R1 gets breached, gold prices will start testing R2. However, looking back since July, these levels have served as a strong resistance. Will this time be different?
S&P TECHNICAL SIGNALS
The S&P 500 is trading below its long term (200-day) moving average. S&P has failed to break past this level several times this year indicating stubborn resistance. S&P 500 also broke out of its ascending channel pointing to uptrend reversal. Currently trading above its S1 pivot support level, any breach of this support, could send S&P 500 down to S2 levels.
TRADE SETUP
A spread position of long CME Micro Gold Futures and short CME E-mini Micro S&P 500 futures.
Spread contracts require notional value of each contract to be nearly equal. Each contract of micro gold futures provides exposure to 10 troy ounces of gold (~$18,280) while each contract of CME Micro E-mini S&P 500 futures provides exposure to $5 x S&P 500 (~$19,470), at current prices.
Entry: 0.466
Target: 0.510
Stop Loss: 0.435
Reward/Risk Ratio: 1.15
Profit at Target: $1,562.75
Loss at Stop Loss: $1,356.63
MARKET DATA
CME Real-time Market Data help identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com/gopro/
DISCLAIMER
Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
This material has been published for general education and circulation only. It does not offer or solicit to buy or sell and does not address specific investment or risk management objectives, financial situation, or particular needs of any person.
Advice should be sought from a financial advisor regarding the suitability of any investment or risk management product before investing or adopting any investment or hedging strategies. Past performance is not indicative of the future performance.
All examples used in this workshop are hypothetical and are used for explanation purposes only. Contents in this material is not investment advice and/or may or may not be the results of actual market experience.
Mint Finance does not endorse or shall not be liable for the content of information provided by third parties. Use of and/or reliance on such information is entirely at the reader’s own risk.
These materials are not intended for distribution to, or for use by or to be acted on by any person or entity located in any jurisdiction where such distribution, use or action would be contrary to applicable laws or
BULLISH GOLD DRIVERS
Falling Production: Gold production has been declining since 2019. Many gold miners have moved into battery metals and mineral resources. Miners have also reduced investments into exploration, making long-term supply anemic.
Shrinking Reserves: Gold Reserves held by the top ten miners have shrunk by 33% over the last decade. Quality of remaining reserves is also deteriorating.
Flight to Safety: Worsening global economic conditions has thrusted gold to emerge as a haven with flight to safety pushing gold demand up 28% this year as per World Economic Federation.
Central Banks Buying Binge: Central banks are on gold buying spree not seen since 1967. Ratio of central bank buying to total gold purchases is at a ten (10) year record. Central banks of China (32 tons), Turkey (31.17 tons) and India (17.46 tons) are amassing gold at record pace.
Impending US Recession: Recession fears are soaring. Although, Fed opines that the US could still narrowly miss a recession, the prospect of one seems likely. In recessions, gold has an impeccable track record of outperforming equities. Poly-crisis aggravates the urgency and flight to safety.
During the last four Fed tightening cycles from 1994 to 2015, gold typically underperforms in the six-months preceding the rate hiking phase. Post that, Gold tends to outperform both US equities and USD.
Higher Rates Devalues Equity and Bonds: When markets carry higher rates for longer, bonds and equities underperform. Investors with the classic 60-40 portfolios which are deeply underwater in 2022 will look to hedge with uncorrelated assets such as gold during recessions.
KEY TAKEWAYS FROM COT AND OPTIONS MARKET
Gold Net Longs Doubled: Over the last 12 weeks, institutional investors including hedge funds have substantially increased their net long positions in CME Gold Futures by 97.3%.
S&P 500 Shorts Up +6.7%: During the same period, CME E-mini S&P 500 futures have seen institutional traders (including hedge funds) increase their short positions by 6.7%.
S&P 500 Put-Call Ratio High: Ratio of number of puts to calls on US options exchanges touched 2.03x last week which is unprecedented since 2004. Typically averaging below 1, on one rare occasion has this ratio inched closer to 1.5x. Fear of a falling market is palpable. In other words, there are twice as many positions betting on US equity markets falling than rising.
GOLD TECHNICALS
Short-term moving average (20-day) recently intersected a falling Long-term moving average (200-day) suggesting a potential rally. Stochastic and RSI have moderated over the past week and appears neutral. Gold is testing its R1 pivot level. If R1 gets breached, gold prices will start testing R2. However, looking back since July, these levels have served as a strong resistance. Will this time be different?
S&P TECHNICAL SIGNALS
The S&P 500 is trading below its long term (200-day) moving average. S&P has failed to break past this level several times this year indicating stubborn resistance. S&P 500 also broke out of its ascending channel pointing to uptrend reversal. Currently trading above its S1 pivot support level, any breach of this support, could send S&P 500 down to S2 levels.
TRADE SETUP
A spread position of long CME Micro Gold Futures and short CME E-mini Micro S&P 500 futures.
Spread contracts require notional value of each contract to be nearly equal. Each contract of micro gold futures provides exposure to 10 troy ounces of gold (~$18,280) while each contract of CME Micro E-mini S&P 500 futures provides exposure to $5 x S&P 500 (~$19,470), at current prices.
Entry: 0.466
Target: 0.510
Stop Loss: 0.435
Reward/Risk Ratio: 1.15
Profit at Target: $1,562.75
Loss at Stop Loss: $1,356.63
MARKET DATA
CME Real-time Market Data help identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com/gopro/
DISCLAIMER
Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
This material has been published for general education and circulation only. It does not offer or solicit to buy or sell and does not address specific investment or risk management objectives, financial situation, or particular needs of any person.
Advice should be sought from a financial advisor regarding the suitability of any investment or risk management product before investing or adopting any investment or hedging strategies. Past performance is not indicative of the future performance.
All examples used in this workshop are hypothetical and are used for explanation purposes only. Contents in this material is not investment advice and/or may or may not be the results of actual market experience.
Mint Finance does not endorse or shall not be liable for the content of information provided by third parties. Use of and/or reliance on such information is entirely at the reader’s own risk.
These materials are not intended for distribution to, or for use by or to be acted on by any person or entity located in any jurisdiction where such distribution, use or action would be contrary to applicable laws or
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