3/23/17: Adding more DUST

I have continued to increase my positioning in DUST in light of the analysis posted in the previous days. I still feel gold is likely to drop lower in the coming weeks.

3/22/17: The US Dollar finds daily support

In my last post, I argued that the US dollar is highly correlated to gold, although it is a negative correlation. Continuing the thought, if the US dollar rises, that would be bearish for gold. On a daily chart, support has come in the dollar (UUP). If it can bounce from these levels, gold may fall at least short term.

The weekly chart also looks more bullish than bearish, with UUP already having broken above previous resistance.

The monthly chart shows a different and more bearish story for the US dollar, which is why I am hesistant to say gold has that far to fall here. Resistance has formed on the US dollar.

My conclusion:

Gold is more bearishly aligned in the near term (coming months), but may be poised for a rally in the longer run (looking out 6 months to a year). I'll play this by ear, but first things first, the dollar needs to rally from here. Once that starts, gold may pull back.

What correlates the most with gold prices?

There are many theories floated around online about which variable affects gold prices the most. Some say interest rates are important because gold doesn't provide yield, so high interest rates will cause gold to fall. Still others claim that gold is more like a currency that is most affected by the dollar, or it is rises with volatility.

No need to speculate further about which argument carries the most weight. I ran a correlation on GLD versus a number of popular instruments to find out which had the most correlation. I ran correlations for the S&P 500, 30 year treasuries, the VIX (volatility) and the US dollar. Which won out?

According to the chart below, the most consistent correlation was an inverse correlation with the US dollar. When the US dollar rises, gold falls. When it falls, gold rises. There were times when gold rose with the S&P 500. Other times it fell. The same was true of bonds and volatility. It appears, based on this evidence, that gold *is* most like a currency, and if you can predict which direction the US dollar is going, you are likely to win big in gold. However, if you can successfully predict the US dollar, perhaps it would be simpler to just trade the US dollar!

Update:

A reader suggested I look at correlations to real interest rates. I pulled the correlations for 5, 10, and 20 year rates. They all look roughly the same. While there is a tendency for there to be a slight negative correlation at times with interest rates, it isn't nearly as consistent as the correlation with the US dollar. I used $GOLD to get more data this time, and can definitely confirm that the US dollar is the main driver for the price of gold.

3/20/17: Entering DUST long

I began buying DUST this morning with a small position that I will add to in the event the trade begins to work. The basis for this trade can be found here

3/17/17: The State of the Precious Metals Market

Right now, I'm looking at buying silver (SLV) as the next trade, but before that, a short position in gold (GLD) might be desirable.

Why are we interested in buying silver vs gold? The gold to silver ratio is too high right now. Historically, silver should be expected to outperform gold for the coming years. In fact, the green lines represent local peaks in the gold to silver ratio. When it turned lower, this also was very good for the stock market as well. Perhaps this signals an incoming wave of inflation, higher interest rates and economic growth. Gold does better when stocks are overvalued. However, I don't see strong enough evidence yet to dip my toes into buying silver. The various charts I use to track it don't show a strong edge at this time.

Why might gold be a good shorting opportunity? Namely, it is in a stage right now where it is more likely to head lower. Fundamentally, the Fed continues to hike interest rates, which isn't good for gold since it yields nothing. From a chart perspective, I believe it is about to roll over, as is apparent on its weekly chart which has formed a resistance level. Perhaps when weekly support comes in, we'll have a better buying opportunity in precious metals.

Seasonal Trades

This is a list of the best seasonal trades for each asset class, based on research gathered from Equity Clock.com.

Cocoa (CC, NIB)

Trade 1 - Sell in mid March, cover in early May
Trade 2 - Sell in late September, buy in November, sell in mid December

Coffee (KC, JO)

Trade 1 - Buy in January, sell in mid March, buy in mid April, sell in late May, cover in late June
Trade 2 - Sell in early September, cover in early October

Copper (HG, JJC)

Trade 1 - Buy in early December, sell in late July
Trade 2 - Sell in late September, cover in late October

Corn (C, JJG)

Trade 1 - Buy in early December, sell in early June, cover in early October

Cotton (CT, BAL)

Trade 1 - Sell in early March, cover in August
Trade 2 - Buy in mid November, sell in late January

Crude Oil (CL, OIL, USO)

Trade 1 - Buy in mid January, sell in late September, cover in early December

Feeder Cattle (FC)

Trade 1 - Buy in late April, sell in mid September, cover in early December

Orange Juice (OJ)

Trade 1 - Buy in mid September, sell in mid December, cover in mid February

Gold (GC, GLD)

Trade 1 - Buy in mid September, sell in early October
Trade 2 - Buy in early November, sell in late February, cover in early April
Trade 3 - Sell in late May, buy in mid June, sell in mid July, cover in late August

Hard Red Winter Wheat (KW)

Trade 1 - Sell in mid June, cover in early July
Trade 2 - Buy in early August, sell in late September

Heating Oil (HO, JJE)

Trade 1 - Buy in early December, sell in late September

Lean Hog (HE)

Trade 1 - Buy in late February, sell in late April
Trade 2 - Sell in mid May, buy in late August, sell in early October 

Live Cattle (LE)

Trade 1 - Buy in mid May, sell in early August

Lumber (LB)

Trade 1 - Sell in mid February, buy in early October, sell in late November

Natural Gas (NG, GAZ, UNG)

Trade 1 - Buy in mid February, sell in mid June, cover in early September
Trade 2 - Buy in early September, sell in late October

NY Harbor Blendstock RBOB (UHU)

Trade 1 - Buy in mid February, sell in late June, cover in mid February

Oats (ZO)

Trade 1 - Buy in mid February, sell in early March
Trade 2 - Sell in mid June, cover in early August
Trade 3 - Buy in early September, sell in mid October

Platinum (PL, PGM, PPLT)

Trade 1 - Buy in late October, sell in early June, cover in late October

Rough Rice (RR)

Trade 1 - Sell in early January, buy in late February, sell in late April, cover in late June
Trade 2 - Buy in late October, sell in early November

Silver (SI, SLV)

Trade 1 - Buy in late October, sell in mid February
Trade 2 - Sell in late May, cover in late June
Trade 3 - Sell in early August, buy in mid September, sell in early October

Soybean Oil (BO)

Trade 1 - Buy in early October, sell in late November
Trade 2 - Buy in late January, sell in early May, cover in early October

Soybeans (S)

Trade 1 - Buy in early February, sell in mid July
Trade 2 - Sell in mid July, buy in early August, sell in mid September, buy in early October, sell in mid January

Sugar (SB, SSG)

Trade 1 - Buy in late May, sell in early August, buy in early October, sell in early January

Unleaded Gasoline (QU)

Trade 1 - Buy in mid January, sell in mid June, cover in early December

Wheat (W)

Trade 1 - Sell in early March, cover in late March
Trade 2 - Sell in mid June, cover in early July
Trade 3 - Buy in early December, sell in early January