Tactical Trading Opportunities in Gold in 2024
Gold prices in 2023 defied expectations. In 2023, economic uncertainty was in plenty with rapidly rising inflation. There was market consensus that recession would benefit gold.
Gold indeed delivered stellar performance rising 12% through 2023. It was not because of a recession though. Most major economies successfully dodged a recession. Inflation trended downwards through most of 2023 and economic growth in the US remained resilient.
So, what drove up gold prices? It was geopolitical shocks and mini financial shocks from the regional banking crisis that have turbo charged gold prices.
Heading into 2024, markets are betting on rate cuts. Soft landing looks increasingly likely. Inflation has abated. A soft-landing does not bode well for gold but turbulent geopolitics across multiple theatres present tactical gold trading opportunities.
GEOPOLITICS REMAIN A KEY DRIVER FOR GOLD
Heading into 2024, tensions in the Red Sea are elevated and could spiral into a wider regional conflict. Heightened and rising hostilities remain the strongest tailwind for gold.
Gold prices continue to respond strongly to geo-political risk. On Friday 12/Jan, US strikes at Houthi rebels drove markets to the edge. Gold prices rose, breaking a losing streak from the start of the year.
With multiple ongoing conflicts, gold prices retain a bullish sentiment. CME Group Gold options have a positive skew with implied volatility for call options ~25% higher than that for puts with a recent rise in skew.
Moreover, adding to geopolitical complexity is the political uncertainty this year as seventy countries will hold elections this year. That is more than one-third of all nations and half the global adult population.
MONETARY POLICY UNLIKELY TO LEAD TO STRONG GOLD RETURNS
The monetary policy outlook remains split across major economies. Major central banks have provided contrasting outlooks. In the US, inflation has cooled rapidly over the past few months which drove the Fed to provide a dovish outlook for rates in 2024. Others like the BoE and ECB have maintained hawkish tones. Gold investment demand is affected by interest rates.
Monetary policy is likely to follow inflation and economic trends. Economic trends remain unpredictable. Last week, a stronger than expected CPI reading showed inflation ticking back up to 3.4% in December.
Economic growth is also a concern. The US is expected to have slowed in Q4. The slowdown is forecasted to be temporary with growth expected to recover in 2024. However, history shows that rapid rate increases, like the ones seen over the last two years, most often lead to a recession, as demonstrated by seven out of the last nine rate hiking cycles.
Despite the recent CPI report, CME Group’s FedWatch signals seven rate cuts in 2024 as of January 14th. For reference, Fed’s dot plot suggested merely three cuts. The market consensus around rate cut may be too optimistic, and a higher rate regime risks economic slowdown.
If the US successfully achieves a soft landing, gold prices are likely to deliver mediocre returns. In that case, the presently elevated prices along with continued investor rotation out of gold, would subdue prices further.
However, if economic conditions worsen and tilts towards a recession, gold prices are likely to outperform, as highlighted by Mint Finance in a previous paper.
MARKET SENTIMENT HAS A BULLISH TILT
The latest COT report released on January 12th showed asset managers scaling back net long positioning by 20,690 contracts or 19%. Nevertheless, they remain heavily net long suggesting an overall bullish sentiment among asset managers.
Options paint a similarly bullish trend with a net increase in call OI between January 5th to 12th. Options positioning covers bullish sentiment resulting from middle east escalations last week.
Demand from central banks remains a strong driver for gold too. Despite a slowdown in mid-2023, central bank buying remains elevated from pre-pandemic levels and purchases have started to ramp up once more in H2 2023.
Gold investment is slowing because of asset rotation. SPDR Gold Trust (GLD) saw large inflows in October and November but since December, it has seen net outflows with outflows accelerating in 2024. Recent investor rotation out of gold is even more apparent in the outflows from SGLD. Gold ETF outflows have gone to bond ETFs like TLT and equity ETFs like SPY.
TRADE SETUP
Given the escalating conflict in the middle east along with the positive market sentiment, investors can benefit from short-term moves in gold prices in a margin efficient manner using CME Group Micro Gold Futures.
Micro Gold Futures have a maintenance margin of just USD 830 and provide exposure to ten troy ounces of gold. This translates into effective leverage of twenty-five times at current prices.
The hypothetical trade setup below describes a position in Micro Gold Futures expiring in April 2024 (MCGJ2024).
• Entry Level: USD 2,071
• Target: USD 2,112
• Stop Loss: USD 2,040
• Profit at Target: USD 410 [(2,112 – 2,071) x 10]
• Loss at Stop: USD 310 [(2,040 – 2,071) x 10]
• Reward to Risk Ratio: 1.32x
Alternatively, given the elevated volatility for call options now combined with the downside to gold price in case of a soft landing, investors can opt to sell covered calls to generate recurring income as previously described.
MARKET DATA
CME Real-time Market Data helps 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 tradingview.com/cme/.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Gold indeed delivered stellar performance rising 12% through 2023. It was not because of a recession though. Most major economies successfully dodged a recession. Inflation trended downwards through most of 2023 and economic growth in the US remained resilient.
So, what drove up gold prices? It was geopolitical shocks and mini financial shocks from the regional banking crisis that have turbo charged gold prices.
Heading into 2024, markets are betting on rate cuts. Soft landing looks increasingly likely. Inflation has abated. A soft-landing does not bode well for gold but turbulent geopolitics across multiple theatres present tactical gold trading opportunities.
GEOPOLITICS REMAIN A KEY DRIVER FOR GOLD
Heading into 2024, tensions in the Red Sea are elevated and could spiral into a wider regional conflict. Heightened and rising hostilities remain the strongest tailwind for gold.
Gold prices continue to respond strongly to geo-political risk. On Friday 12/Jan, US strikes at Houthi rebels drove markets to the edge. Gold prices rose, breaking a losing streak from the start of the year.
With multiple ongoing conflicts, gold prices retain a bullish sentiment. CME Group Gold options have a positive skew with implied volatility for call options ~25% higher than that for puts with a recent rise in skew.
Source: CVOL
Moreover, adding to geopolitical complexity is the political uncertainty this year as seventy countries will hold elections this year. That is more than one-third of all nations and half the global adult population.
MONETARY POLICY UNLIKELY TO LEAD TO STRONG GOLD RETURNS
The monetary policy outlook remains split across major economies. Major central banks have provided contrasting outlooks. In the US, inflation has cooled rapidly over the past few months which drove the Fed to provide a dovish outlook for rates in 2024. Others like the BoE and ECB have maintained hawkish tones. Gold investment demand is affected by interest rates.
Monetary policy is likely to follow inflation and economic trends. Economic trends remain unpredictable. Last week, a stronger than expected CPI reading showed inflation ticking back up to 3.4% in December.
Economic growth is also a concern. The US is expected to have slowed in Q4. The slowdown is forecasted to be temporary with growth expected to recover in 2024. However, history shows that rapid rate increases, like the ones seen over the last two years, most often lead to a recession, as demonstrated by seven out of the last nine rate hiking cycles.
Source: World Gold Council
Despite the recent CPI report, CME Group’s FedWatch signals seven rate cuts in 2024 as of January 14th. For reference, Fed’s dot plot suggested merely three cuts. The market consensus around rate cut may be too optimistic, and a higher rate regime risks economic slowdown.
If the US successfully achieves a soft landing, gold prices are likely to deliver mediocre returns. In that case, the presently elevated prices along with continued investor rotation out of gold, would subdue prices further.
Source: World Gold Council
However, if economic conditions worsen and tilts towards a recession, gold prices are likely to outperform, as highlighted by Mint Finance in a previous paper.
MARKET SENTIMENT HAS A BULLISH TILT
The latest COT report released on January 12th showed asset managers scaling back net long positioning by 20,690 contracts or 19%. Nevertheless, they remain heavily net long suggesting an overall bullish sentiment among asset managers.
Options paint a similarly bullish trend with a net increase in call OI between January 5th to 12th. Options positioning covers bullish sentiment resulting from middle east escalations last week.
Source: QuikStrike
Demand from central banks remains a strong driver for gold too. Despite a slowdown in mid-2023, central bank buying remains elevated from pre-pandemic levels and purchases have started to ramp up once more in H2 2023.
Source: World Gold Council
Gold investment is slowing because of asset rotation. SPDR Gold Trust (GLD) saw large inflows in October and November but since December, it has seen net outflows with outflows accelerating in 2024. Recent investor rotation out of gold is even more apparent in the outflows from SGLD. Gold ETF outflows have gone to bond ETFs like TLT and equity ETFs like SPY.
TRADE SETUP
Given the escalating conflict in the middle east along with the positive market sentiment, investors can benefit from short-term moves in gold prices in a margin efficient manner using CME Group Micro Gold Futures.
Micro Gold Futures have a maintenance margin of just USD 830 and provide exposure to ten troy ounces of gold. This translates into effective leverage of twenty-five times at current prices.
The hypothetical trade setup below describes a position in Micro Gold Futures expiring in April 2024 (MCGJ2024).
• Entry Level: USD 2,071
• Target: USD 2,112
• Stop Loss: USD 2,040
• Profit at Target: USD 410 [(2,112 – 2,071) x 10]
• Loss at Stop: USD 310 [(2,040 – 2,071) x 10]
• Reward to Risk Ratio: 1.32x
Alternatively, given the elevated volatility for call options now combined with the downside to gold price in case of a soft landing, investors can opt to sell covered calls to generate recurring income as previously described.
MARKET DATA
CME Real-time Market Data helps 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 tradingview.com/cme/.
DISCLAIMER
This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services.
Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
Full Disclaimer - linktr.ee/mintfinance
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