How a Hedge Fund Manager trades Gold

17 lip 2017

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Featured in our Trading Club, 4th July

Our checklist provides a systematic process that fellow hedge fund managers and traders employ to analyse markets, from which the biggest trading decisions are made. We use similar versions to analyse major currencies, stock markets and other commodities such as crude oil, and score each factor +1, -1 or 0 depending on whether they are regarded as positive, negative or neutral for the coming month. The total ranges from +7 to -7, with a positive score indicating a potential buy, and a negative score suggesting that you may look to sell (closing long positions or going short). Sometimes of course there will be a neutral total of 0 - which in itself can be valuable in protecting your P&L by avoiding trades when there is nothing to be done.

• Excess liquidity. When annual growth in the money supply exceeds industrial production, as it does currently, the number is positive and is considered a bullish factor for gold as an alternative store of value and hedge against the erosion of purchasing power. This doesn't tend to change month-to-month and has indeed been positive for some time. (+1)
• Real interest rate. Those of you who follow us know why we like to look at the so-called 'real rate’. When this is negative it means that domestic US savers and foreign investors are growing poorer by holding cash, which is a great reason to buy gold. For now though, the uptick makes gold less appealing as an alternate store of value against fiat currencies. (-1)
• ETF Flows. We also like to look at whats happening in ETFs. In the case of gold we are looking for any divergence between the spot gold price and a widely traded Exchange Traded Fund which tracks gold. Currently this is neutral as there is no divergence, indicating that things are behaving normally. (0)
• Futures positioning. We view speculative positioning as contrarians. Presently the net position is in the middle of the recent range and pretty much unchanged on the previous month. No directional signal here either. (0)
• Options positioning. Lex and I also look at the options market for clues. Although it is unusual to derive a contrarian signal from the options market if the futures position is not at an extreme, when you do see them it can be very insightful. For now though, whilst the risk reversal indicates a preference for upside bets, it is far from extreme and basically neutral, at least for now. (0)
• Short interest. Short interest in the gold miners has EXPLODED higher in recent weeks. This is not only a clear positive for contrarian gold investors, but also something that I want to do some further research in to. Even though there was no pessimism (let alone extreme pessimism) in the futures and options components on our checklist, when stock investors are suddenly making record short bets in shares of related mining companies, it tells me that there may be an opportunity coming. (+1)
• Seasonality. Gold tends to move in line with historical seasonal trends as much as any asset out there. However, whilst the summer months (including July) tend to be the best for gold, there have been some significant declines too. So even though we wouldn’t trade gold based on seasonality alone, it is a factor worth considering in our checklist. (+1)

Overall, we arrive at a total score of +2 for gold heading in to July. Whilst technical analysts may say that the chart looks pretty negative, the our checklist suggests that gold bears may be caught short by the bull case captured in our objective trading process.

Learn with the Lex van Dam Trading Academy on TradingView! https://www.tradingview.com/edu/