A Simple Gold Risk Management Indicator
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There is a saying in the metals world that trading silver is the fastest way to become a millionaire, if you started a billionaire. Precious metals are notoriously hard to trade and its easy to get chopped up in the market volatility.
Great precious traders routinely get top and tailed because the market isn’t necessarily responding to one factor or another that had been reported to move the price. One week it can be real rates, another CB purchases - the narrative always changes because the sell side need to sell you something. Equally - being ignorant to the market risks or idealistic about holding precious metals can result in catastrophic losses to your books pnl.
There is some arguments whether Precious Metals are a currency or commodity - both have reasonable points. In my view the one major factor to remember is that the commodity aspect of precious will determine the production supply pressure in the market. Miners hedge their production daily - the more metal they need to hedge, the more buying pressure they can soak up. Given that the metals are generally held as reserve assets (Gold more so than Silver) - the same cannot be said of demand. Simply put - the pool of precious assets - largely - continues to grow.
What i’ve noticed over the last decade is that Asian Gold prices seem to lead the market. I have no real idea why - I have a couple of theories that I have outlined below but who really knows, correlation doesn’t necessarily mean causation.
Asia is the mercantilist center of the world. This leaves them at the starting block of trade flows and first to experience strength/weakness. When the balance of liquidity changes - they feel it first
The growth in US deficits has fueled enormous capital into China as it performs its mercantilist role - how China disseminates this capital across its trade partners drives the real availability for USD liquidity. This is reflected within their currencies. The correlation of this seems to be growing as the number of petrodollars from the US falls, making China the main source of USD capital to the Eurodollar system. Represented in its most simple way - China Credit Impulse Up (top chart) → USD exported to trade partners → precious up (bottom chart)… and vice versa.
Timing these turns in the credit impulse requires a certain amount of China watching but they are usually quite transparent with their intentions.
To simplify the process - I tend to look at gold prices in Asian Currencies.
Below is a chart of XAU Spot / ADXY Index
You will notice that vs. the USD chart - its recent retracement pulled right back to the 2011 highs to find support vs. the USD chart that trades in no mans land
What I then do is apply a very basic momentum framework to my XAU/ADXY chart by saying we have a buy signal over the 50 week MA and a sell signal below. This does result in some periods of chop but also provides timely entry and risk management during a trending market
The aim is to avoid capital impairment and maximise pnl during trending markets.
This XAU/ADXY momentum based approach tends to keep you out of trouble.
There are some additional overlays that you can add to help you risk manage aggressively trending markets. Some work by MacroOps first highlighted this to me but Gold tends to struggle once its 20% over its 200d MA. I’m sure there is some optimising that could be done around exact numbers but as a principle - it will provide you with an warning signal.
Top chart - deviation from 200d MA - White line = 20%
Bottom chart - Gold price in USD
2009-2022
2004-2009
It’s taken years of gains and losses - over optimism and excessive pessimism - to learn what i’ve outlined above. It’s far from a crystal ball but it will help you skew odds in your favour.
Good luck