Since the beginning of 2013 we have been bearish on gold, holding the view that the Fed would take a hawkish stance that would drive the yellow metal lower. This year we have maintained that view, although less aggressively than in the past. In 2015 we have traded gold on the view that the Fed will hike if economic data provides sufficient pressure, which has led us to construct our gold portfolio to take advantage of a rate hike either before or at the December FOMC meeting.
One of the trades that we opened on this view was to Short GLD Jan ’16 $112/$117 Vertical Call spreads. We opened this trade as gold challenged resistance at $1150 in late September, receiving a net credit of $1.50.
While gold declined immediately following this trade being opened, the metal rallied back challenge the strong resistance level of $1180 in October. This move pushed gold above a wedge formation that had held since August and showed gold to be temporarily strong from a technical perspective.
However, this was not to last. Fed Chair Janet Yellen signalled at the October FOMC that the first hike would come at the December meeting provided that the data was strong enough. The hawkish statement ensured that gold’s technical strength was quickly overpowered and pushed the metal lower.
The fundamentals then became even more bearish for gold with the US employment report for October, which showed some of the strongest data seen for the entire year. Markets immediately drew the same conclusion that we did, that this print all but guaranteed a December hike, and gold tumbled further.
By the end of trading on Friday gold was challenging support at $1080, rather than the resistance $100 higher that it had been attempting to break only a two weeks earlier.
This decline slowed on November 9th, with the yellow metal in fact climbing back a nominal amount before the close. We had anticipated this, writing in our market update to subscribers the day before that
“…there is a potential for a minor bounce due to the technical situation. Gold has fallen considerably and quickly since peaking in mid-October. The speed of this fall has led to the metal becoming oversold, indicated by the RSI falling below 30. The MACD has begun to converge towards a positive crossover, which will likely cause minor technical buying. The most likely technical factor that is likely to cause a small bounce in the metal is the support of $1080. This level is likely to at least slow gold’s descent and has the potential to act as a base from which a small rally can be mounted.”
As a result, we were able to lock in profits on our Short $112/$117 GLD Vertical Call Spread. We signalled to our subscribers to exit the trade by buying the spread back for $0.34, banking a 33.14% profit in just over 6 weeks.
This marks the 160th profitable trade that we have closed and means that we have now closed 10 times more winning trades than losing ones.
These trades have returned a total 1208.86% since inception and an annualized return of 50.75%.
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