Gold continues to fall as buyers scratch their heads, wondering if what we’re seeing is the beginning of another down trend. The truth is, it could be. However, for that small sample of people who call themselves “short-term investors” (or traders), there is some short-term statistical hope to go along with their portfolio management ADD.
The magic number on the charts for gold is $1,071-1,072. If Gold falls below that price, chances are, we’re headed lower from here. There’s no guarantee, but this range is July’s lows and if that trapeze net breaks, there’s no telling how low it can go.
With that said, if short-term traders can use this as a potentially profitable risk/reward trade. As I write this little report, gold is trading at roughly $1,087/oz. Using $1,071 as a drop-dead, hard stop, your total potential loss if you buy right now is only -1.47%. On the other hand, your upside potential is enormous, all depending on where the price goes from here. The point here is, as long as you put an exit strategy in place, your downside is limited and your upside is potentially unlimited.
The gold lining here (see what I did there?!) is that gold has some upside seasonality this time of year. According to the Stock Trader’s Almanac, buying gold on or around November 18th and selling it on December 3rd has yielded 22 winning trades over the last 40 years (that’s a 55% winning percentage). More importantly, the total profit on a $10,000 investment would’ve been $25,990 if you made this trade every single year for the last 40. Add in the fact that gold is pretty oversold at this point and we’ve got ourselves a great risk/reward trade that sits deep on the trampoline (assuming the trampoline doesn’t break below our feet, of course, but that’s why we have an exit strategy)!
Now, I’m not one to put upside targets on any investment. I tend to want to trim my losers, using exit strategies such as the one mentioned above, and then I proceed to let my winners run, bumping up that trailing stop loss over time until I “lock in” gains. When the investment starts to fail on me and (gold in this case) hits that metaphorical trapeze net, I get out, wash my hands, and go find something else to buy. However, since gold has been in a downtrend with so much negative pressure this last few years, an upside target would be necessary in my opinion, if you are a trader looking to dip your toes into the yellow metal.
For the average investor, let’s consider the SPDR Gold Trust (GLD) as a good investment to use for gold exposure. Right now, the gold ETF is trading around $104.08 with a July low right between $103-104. Similar to the gold Comex price, we’ve got a nice, tight exit strategy here. So an investor could use the current price as an entry point with $102.99 as the drop-dead sell stop.
From there, I’d pick an upside target to sell on the top side. If it were me, I wouldn’t be greedy. The average return on this seasonal trading strategy is right around 6.5% per trade. A gain of 6.5% on $104.08 would put the price of GLD just north of $110/share, but I would also eyeball December 3rd (+/- a couple days) as your time-frame. If you want to be more conservative, I’d even set a price objective of $109 on the top side, walk away with your 4.7% return, and head to the mall (or Amazon.com, like I do).
If you’re one of those short-term, aggressive traders who want to play ball here, just make sure you’re paying attention. You can’t invest like this and walk away. Be sure to set alerts and if you have the ability, put in an open sell stop order at $102.99 on the GLD and go put the lights up on your house for the holidays. While November 18th hasn’t yet arrived, gold’s oversold nature has set up a pretty picture for the short term trader looking to make a little extra shopping money for the holidays.
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Disclosures: All index returns are rounded to the nearest tenth percent. All data above sourced via Yahoo! Finance. The proxy used for international investments is the ACWX (all country world index ex-US). The proxy used for commodities is the DBC (PowerShares commodities index). Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
The opinions mentioned in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. Past performance is not guarantee of future results. Economic forecasts set forth may not develop as predicted. The views and opinions expressed in this commentary are those of Adam Koos and do not necessarily represent the views of TD Ameritrade and its affiliates. Investing involves risk including loss of principal.
Categories: Adam Koos, CFP®, CMT®, Market Commentary