Initiating a long term bullish position in gold
Updated
This is an analysis that I hope that it ages well, as I am starting a long term position in gold today and adding this asset to my investment portfolio. Therefore, this is not a post about an isolated trade, with a specific expiration date or focused on the short-term.
In fact, from a trading point of view I have already lost some great entry opportunities, since November 2022, which the asset provided. Looking back on the chart, I could see four previous entry opportunities that fit my setups. Unfortunately, I wasn't psychologically prepared to trade them and I was left out, but I will try to take some advantage of this situation and later write a study post pointing out these entries. Another post on trading psychology, This is an analysis that I hope that it ages well, as I am starting a long term position in gold today and adding this asset to my investment portfolio. Therefore, this is not a post about an isolated trade, with a specific expiration date or focused on the short-term.
In fact, from a trading point of view I have already lost some great entry opportunities, since November 2022, which the asset provided. Looking back on the chart, I could see four previous entry opportunities that fit my setups. Unfortunately, I wasn't psychologically prepared to trade them and I was left out, but I will try to take some advantage of this situation and later write a study post pointing out these entries. Another post on trading psychology, fears involved, strategies to control them and analysis paralysis may also be written later (spoiler: risk sizing and embracing the risk consciously helps to tame the beast).
However, from an investment point of view, with a long-term perspective and also taking advantage of some hedging to reduce risk, it is better to buy gold late than never, or as I prefer to say, better late than too late. Because if a strong bull run starts after this breakout, I would regret not buying at the $2000 quote level. And, yes, there are indications that this may become a reality.
The first indication comes from the analysis of the chart, gold prices have been stuck into a multi-year congestion between $1700 and $2000. Tipically, the longer the congestion is, the more intense its breakout and further away the target, and historically gold has been king of this setup. The $2000 level is where the price peaked during the covid crisis and the russian invasion of Ukraine. I mean, this price level is imposing a very strong limit on quotations. But we're now facing the threat of a future interest rate and expected inflation much higher than we've been used to over the last decades (since the 90s, specifically), and these things could be a real game changer for the market scenario. So, here the gold quotes are, back at the $2000 resistance level and showing strong volume near it. Of course, resistance can work once again, but we have to trade probabilities and deal with risk, and that means grabbing a good entry opportunity like this one, and accepting a loss if the signal deviates.
The second indication comes from the analysis of the market cycle. All clues point to the fact that we may already be at the beginning of a secular bear market cycle, which means that expected future returns for the next years (10y average) can be near zero, single digit, or even negative. I'm not predicting some kind of crash here, it's different, this is not a single intense bearish movement, but a future outlook of low stock market growth. Using the model published by Ed Easterling in his book, Unexpected Returns, the top (thus the beginning of the end) of a secular bull market comes with high P/E's, low dividend yields, low inflation and low interest rates. This was just the scenario we had few years ago and it started to crack, first inflation got out of control (2021), then interest rates started to rise (2022) and P/E's just began to fall with last year falling quotes, but it's still on a high level, so this could just be the beginning of this cycle of low returns.
With this in mind, it is important to notice that gold is often the best secular bear market asset par excellence (see the returns in the 2000s and in the 1970s periods), but so far in this newborn bear cycle, gold has yet to shine, despite the very bearish year of 2022.
Considering the secular bear market hypothesis and the very long chart congestion, added to the habit of this asset to make strong breakouts, I decided to initiate a long term bullish position in gold. I made my entry using the ETF GLD. I bought the shares today, March 20th, 2023, at the market opening, @184.17. To manage my risk I also bought a bear put spread with strikes 166/165. I intend to stop the loss if this entry reaches a -6.5% loss. I've bought enough options to pay back my losses if that happens. The protection has cost me 0,8% of the position. Hopefully in the future I will post more about this position, and then I will use the GLD chart. For now, for a general approach, I prefer to do my analysis using the future contract chart.
In fact, from a trading point of view I have already lost some great entry opportunities, since November 2022, which the asset provided. Looking back on the chart, I could see four previous entry opportunities that fit my setups. Unfortunately, I wasn't psychologically prepared to trade them and I was left out, but I will try to take some advantage of this situation and later write a study post pointing out these entries. Another post on trading psychology, This is an analysis that I hope that it ages well, as I am starting a long term position in gold today and adding this asset to my investment portfolio. Therefore, this is not a post about an isolated trade, with a specific expiration date or focused on the short-term.
In fact, from a trading point of view I have already lost some great entry opportunities, since November 2022, which the asset provided. Looking back on the chart, I could see four previous entry opportunities that fit my setups. Unfortunately, I wasn't psychologically prepared to trade them and I was left out, but I will try to take some advantage of this situation and later write a study post pointing out these entries. Another post on trading psychology, fears involved, strategies to control them and analysis paralysis may also be written later (spoiler: risk sizing and embracing the risk consciously helps to tame the beast).
However, from an investment point of view, with a long-term perspective and also taking advantage of some hedging to reduce risk, it is better to buy gold late than never, or as I prefer to say, better late than too late. Because if a strong bull run starts after this breakout, I would regret not buying at the $2000 quote level. And, yes, there are indications that this may become a reality.
The first indication comes from the analysis of the chart, gold prices have been stuck into a multi-year congestion between $1700 and $2000. Tipically, the longer the congestion is, the more intense its breakout and further away the target, and historically gold has been king of this setup. The $2000 level is where the price peaked during the covid crisis and the russian invasion of Ukraine. I mean, this price level is imposing a very strong limit on quotations. But we're now facing the threat of a future interest rate and expected inflation much higher than we've been used to over the last decades (since the 90s, specifically), and these things could be a real game changer for the market scenario. So, here the gold quotes are, back at the $2000 resistance level and showing strong volume near it. Of course, resistance can work once again, but we have to trade probabilities and deal with risk, and that means grabbing a good entry opportunity like this one, and accepting a loss if the signal deviates.
The second indication comes from the analysis of the market cycle. All clues point to the fact that we may already be at the beginning of a secular bear market cycle, which means that expected future returns for the next years (10y average) can be near zero, single digit, or even negative. I'm not predicting some kind of crash here, it's different, this is not a single intense bearish movement, but a future outlook of low stock market growth. Using the model published by Ed Easterling in his book, Unexpected Returns, the top (thus the beginning of the end) of a secular bull market comes with high P/E's, low dividend yields, low inflation and low interest rates. This was just the scenario we had few years ago and it started to crack, first inflation got out of control (2021), then interest rates started to rise (2022) and P/E's just began to fall with last year falling quotes, but it's still on a high level, so this could just be the beginning of this cycle of low returns.
With this in mind, it is important to notice that gold is often the best secular bear market asset par excellence (see the returns in the 2000s and in the 1970s periods), but so far in this newborn bear cycle, gold has yet to shine, despite the very bearish year of 2022.
Considering the secular bear market hypothesis and the very long chart congestion, added to the habit of this asset to make strong breakouts, I decided to initiate a long term bullish position in gold. I made my entry using the ETF GLD. I bought the shares today, March 20th, 2023, at the market opening, @184.17. To manage my risk I also bought a bear put spread with strikes 166/165. I intend to stop the loss if this entry reaches a -6.5% loss. I've bought enough options to pay back my losses if that happens. The protection has cost me 0,8% of the position. Hopefully in the future I will post more about this position, and then I will use the GLD chart. For now, for a general approach, I prefer to do my analysis using the future contract chart.
Note
This position keeps up and running. The prices haven't gone further but also haven't fallen. They were held into this consolidation around the 2000.00 quote, which is not exactly good but also not that bad.Not that good because there is still no profit yet, but not that bad because the fact that the prices got stuck there can mean that this level may be a new acceptable price for gold.
I still have 22 more days of put protection and after it expires I'm considering doing a collar strategy for protection if prices remain inside this range.
Note
Just reviewed this text and noticed that the 2nd paragraph shouldn't be there, that was part of my draft! Sorry, guys!If you read this note before, PLEASE IGNORE THE 2ND PARAGRAPH OF MAR-20 AND JUMP TO THE 3RD! Thank you and sorry again!
Note
Last week my options expired, so I remained unhedged at this position.At the same time gold prices gave some bearish signals, so I decided to sell some future contracts to hedge. These signals and the trade infos are detailed at a new idea that can be found here:
I remain with my long GLD spot position.
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