Gold: Shining Bright with Opportunities
Gold is once again in the spotlight, and here’s why!
Economic Cycles, PMI & Gold
The US Purchasing Managers Index (PMI) is a leading indicator often used to identify turns in the economic cycle. A below 50 PMI print indicates contraction in the US manufacturing cycle, while a print above 50 suggests expansion. Generally speaking, expanding manufacturing cycles spell a boost for industrial materials, like copper, while contractionary periods spell downturns in the economy and a preference for 'flight to safety', boosting gold holdings. An interesting observation from the chart above is the correlation between the Gold/Copper ratio and the inverted US PMI, moving in tandem over the last decade. However, looking at the current scenario, the PMI has turned lower, yet the Gold/Copper ratio has remained relatively muted, suggesting that gold may currently be underpriced. Similarly, the Gold/Silver ratio shows a less pronounced but similar effect.
Significant drops in the PMI below the 50 level have historically triggered notable increases in the Gold/Copper ratio. With the PMI currently below 50 for a sustained period, this might be priming the ratio for a potential upward surge.
Yields, Fed Expectation & Gold
As a non-interest-bearing asset, gold loses its appeal when interest rates rise, leading investors to prefer interest-yielding products. We covered the effect of a Fed rate cut on gold in a previous article here. While the Fed remains steadfast in holding rates, even the act of pausing rate hikes positively impacts gold. This effect is observed via the Gold/US10Y Yields ratio. The previous pause in rate hikes preceded a significant run-up in this ratio. Additionally, this ratio is currently near its resistance level, which it has respected multiple times over the last decade.
With the Fed expected to continue holding rates, now could be an opportune time to consider adding gold to your portfolio.
Gold Price Action
Gold’s current price action also shows a completed cup-and-handle pattern. With an initial attempt to break higher halted, it now trades right above the handle.
Additionally, gold could arguably be trading in an ascending triangle pattern, as noted by its price action as well as generally declining volume, potentially signaling a bullish continuation pattern.
In summary, given the Fed's stance on holding rates, the correlation between PMI and the Gold/Copper ratio, and the bullish technical indicators in gold's price action, a positive outlook on gold seems reasonable. To express our view, we can buy the CME Gold Futures at the current level of 1962. Using the cup and handle pattern to guide the take profit level, at 2400 and stop at 1890. Each 0.10 point move in gold futures is for 10 USD. The same view can also be expressed with greater precision using the CME Micro Gold contract where the notional is one-tenth of the regular size gold contract. Here, each 0.10 point move is for 1 USD.
The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. 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:
The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description.
Reference:
cmegroup.com/markets/metals/precious/gold.contractSpecs.html
cmegroup.com/markets/metals/precious/e-micro-gold.contractSpecs.html
cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
Economic Cycles, PMI & Gold
The US Purchasing Managers Index (PMI) is a leading indicator often used to identify turns in the economic cycle. A below 50 PMI print indicates contraction in the US manufacturing cycle, while a print above 50 suggests expansion. Generally speaking, expanding manufacturing cycles spell a boost for industrial materials, like copper, while contractionary periods spell downturns in the economy and a preference for 'flight to safety', boosting gold holdings. An interesting observation from the chart above is the correlation between the Gold/Copper ratio and the inverted US PMI, moving in tandem over the last decade. However, looking at the current scenario, the PMI has turned lower, yet the Gold/Copper ratio has remained relatively muted, suggesting that gold may currently be underpriced. Similarly, the Gold/Silver ratio shows a less pronounced but similar effect.
Significant drops in the PMI below the 50 level have historically triggered notable increases in the Gold/Copper ratio. With the PMI currently below 50 for a sustained period, this might be priming the ratio for a potential upward surge.
Yields, Fed Expectation & Gold
As a non-interest-bearing asset, gold loses its appeal when interest rates rise, leading investors to prefer interest-yielding products. We covered the effect of a Fed rate cut on gold in a previous article here. While the Fed remains steadfast in holding rates, even the act of pausing rate hikes positively impacts gold. This effect is observed via the Gold/US10Y Yields ratio. The previous pause in rate hikes preceded a significant run-up in this ratio. Additionally, this ratio is currently near its resistance level, which it has respected multiple times over the last decade.
With the Fed expected to continue holding rates, now could be an opportune time to consider adding gold to your portfolio.
Gold Price Action
Gold’s current price action also shows a completed cup-and-handle pattern. With an initial attempt to break higher halted, it now trades right above the handle.
Additionally, gold could arguably be trading in an ascending triangle pattern, as noted by its price action as well as generally declining volume, potentially signaling a bullish continuation pattern.
In summary, given the Fed's stance on holding rates, the correlation between PMI and the Gold/Copper ratio, and the bullish technical indicators in gold's price action, a positive outlook on gold seems reasonable. To express our view, we can buy the CME Gold Futures at the current level of 1962. Using the cup and handle pattern to guide the take profit level, at 2400 and stop at 1890. Each 0.10 point move in gold futures is for 10 USD. The same view can also be expressed with greater precision using the CME Micro Gold contract where the notional is one-tenth of the regular size gold contract. Here, each 0.10 point move is for 1 USD.
The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. 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:
The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description.
Reference:
cmegroup.com/markets/metals/precious/gold.contractSpecs.html
cmegroup.com/markets/metals/precious/e-micro-gold.contractSpecs.html
cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
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