Going for Gold

Sometimes a perfect storm of events creates a major movement of a particular asset. How can traders capitalize on this?

This article was written by Jay Goldman, the Chief Analyst at 10markets.com. He is known for his aggressive trading style and bold predictions that have been extremely successful in today’s market environment.

The Big Trade

Jay Goldman
Jay Goldman

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As a trader I cannot think of a more satisfying feeling than planning and following through on what I call “The Big Trade”.

This is where a perfect storm of events creates an opportunity for us to capitalize on a major movement of a particular asset, where the results can be a major part of our portfolio’s overall returns.

The question then is- how do we identify these opportunities, and how do we maximize our potential returns from them?

Major moves are created either by strong fundamental factors that drive a certain asset in one clear direction, or when the market is taken by surprise on a specific event.

Today I want to focus on an explosive opportunity that I see for the 16th of December.

this situation provides us with very little downside compared to huge potential returns

What’s so special about the 16th of December you ask? This is the day when the Federal Reserve in the United States will finally be raising interest rates for the first time in over eight years, and the market is preparing itself accordingly.

Investors all over the world have been speculating since the beginning of the year on the exact time that the Fed will act, and the consensus is that they will have to pull the trigger during this month’s FOMC policy meeting.

Although this is not a foregone conclusion, the Federal Reserve, led by Janet Yellen, has been sending very clear signals over the last few months so as to not surprise the markets and cause more turmoil and volatility than needed- in fact the market is so confident about the move that it has already been priced in on all the relevant assets.

The trade I want to focus on for this event is gold. The precious metal has been in a freefall lately, dropping 10% in the last month, and almost 20% since the beginning of the year-

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Source: MT4
Source: MT4

The weakness in gold can be attributed to a number of factors- US dollar strength, low worldwide inflation and rising equity markets- but the reason for the decline since the middle of October is directly correlated to market expectations of a US rate hike in December.

Because market sentiment is leaning so heavily to one side, the door is opened for a big move to the contrary when the time is right.

I do expect to see further losses for gold leading up to the Fed decision, with prices most likely falling under $1,050 per ounce.

A perfect storm

This creates a few opportunities for us; firstly, shorting gold in the few days before the 16th, in anticipation that traders would not want to hold on to buy positions so close to a potentially explosive event that could significantly devalue their investment, this trade should be closed before the actual news is released. The second trade (and this is the ‘one’) will be taken right after the decision is made (I am proceeding based on the most likely scenario, where the Fed decide to go ahead with the raise).

To describe the trade, I want to first to go over the schedule for the day.

At 2 PM EST the decision is announced, causing initial volatility and probably further declines in gold prices. This is when we spring into action, and once determining the move is over we start BUYING GOLD very aggressively. The reason for this lies in the second part of the day- Janet Yellen’s press conference.

If you are familiar with the Federal Reserve’s modus operandi, you know that their main goal is balance and keeping market volatility to a minimum, so they will always counter a hawkish move with dovish rhetoric and vice versa. Now, since the market has already made the move on gold, there is not one possible reason the trend will continue during and after Yellen’s press conference- on the contrary, the Fed is not interested in creating a situation where the dollar is too strong, since this is not conducive to their 2% inflation target and hurts US companies compete in the export market. This will result in extremely dovish rhetoric from the Fed Chair and a potentially huge correction in gold prices.

 

I feel that by the end of the day we could see a $50-$60 move up and a $150-$200 correction in the few weeks immediately following the event.

Basically this situation provides us the ultimate ‘free roll’, with very little downside compared to huge potential returns.

All traders dream about is making the right move at exactly the right time, and I feel that this is one of those rare opportunities to ‘go for the gold’.

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