Identifying which strategy works best in a market requires understanding the macro picture, the underlying buyers and sellers, as well as the market structure. If mean reversion strategies were the way to go in the first place, then there is no point in trying to buy a breakout repeatedly in the hope that a trend will suddenly show up that will make all of your losses back. Despite a lot of headwinds, gold's price isn't falling too fast. This may be the ideal time to purchase dips.
Commodity Analysis Gold
Treasury yields rose to fresh two-year highs on expectations of a rate hike sooner than expected by analysts on Wall Street. In tandem with yields, the dollar climbed, and gold prices rose.
Higher bond yields, especially during Q1, and a stronger dollar during the second half of 2021, were the main headwinds for gold in 2021. $1800 has almost become a peg as concerns that inflation surprises would not be transitory, and the general volatility of the market linked to COVID variants and various lockdown measures are keeping precious metals from falling too far.
The real inverse correlation had been the US 10-year inflation-indexed yields. As higher inflation pushed real yields lower, gold had been able to stay bid. Now we're seeing the benchmark yield hit 1.8% for the first time since 2020 which is closing the gap between the CPI and PCE and lifting real yields. The fact that gold rose yesterday speaks of a certain amount of support as expectations of real yields flattening off to steepening have in the past brought the price of gold lower.
The VanEck Gold Miners ETF (GDX) also had a relatively good day yesterday and continues to trade above $30, with $32 as the next swing high resistance level. The price of gold had been tracking lower from the August 2020 highs in lockstep with the gold miners but of late the GDX has not been able to move higher with the gold price, as COVID-19 disruptions and rising yields are having an adverse effect on the miners.
A report from the World Gold Council states that "Gold ETFs experienced net outflows of 6.4t (-US$340mn) in December, consistent with monthly outflows during much of H2 2021. North American outflows of 22t (-US$1.2bn) outweighed inflows into Europe and Asia, which gained a combined 16t (US$942mn) during the month. Other regions saw negative flows for the first time since August, losing US$68mn (-1.2t)." If we're seeing a lack of demand in the ETF this is going to reflect badly on the price. This means that if we can find evidence of flows going back into the ETFs that there has been a shift in sentiment, that would be a good time to buy.
Using the ActivTrader platforms sentiment indicator we can see that most traders on the platform are long gold, though they're not at extreme levels yet.
From looking at the price of gold, which is nearly flatlining the supply versus demand dynamic is coming from the bigger players rather than the small individual investors. There have been two-way trades between sovereign funds and countries. India bought 9.3 tonnes, taking its total holdings up to 37.6 tonnes and bumping its assets under management (AUM) to $2.4bln. In comparison to the USA, India is still relatively small. The US AUM amounts to $100.9bln. The depressing factor was mainly global net flows, which came in at -4.0% after inflows were driven by India and Asia were up 17%. While outflows driven by the USA came to -21%. The supply within the ETFs mainly came from North American funds however central banks sold a net 22t of gold late last year. This marks the first monthly decline since January 2021, when central banks collectively sold a net 11t.
That said the individual investor appetite is higher as can be seen in the sales of gold coins over the course of 2021. American Eagle gold coin sales totaled 42,000oz in December, 15% lower y-o-y. This took full-year 2021 sales to 1,252,500oz, the highest annual total since 2009 (1,435,000oz).
When investing in precious metals miners it is always best to try and bake in some insurance by investing in companies operating within jurisdictions that are friendly towards miners, and have a good rule of law and laws conducive to mining. Stable governments are generally a key aspect of these jurisdictions, especially the democratically elected ones.
In Africa, the Economic Community of West African States (ECOWAS) covers a lot of critical rare earth materials and precious metals mining ventures. Yesterday Reuters ran a piece on the military-led government in Mali and how ECOWAS had imposed sanctions on Mali following a delay in sorting out the politics. ECOWAS insisted that Mali hold elections in February. But the government then said it would only set an election date after holding a nationwide conference – arguing a peaceful vote was more important than speed. One mining company potentially caught up with this is Barrick Gold. They own Mali’s largest gold mine complex Loulo-Gounkoto but released a statement saying its mines had sufficient stocks and stores to continue operating normally, adding however that the situation was "very fluid" and it was monitoring it closely.
The Barrick Gold Corp. has been in a downtrend since the 2020 highs and will need to get back above $25.00 before the market structure signals a significant resistance level has been broken.
Gold is doing a really good job at holding above the $1763/oz and monthly 20-period EMA. In fact, the price of gold on the monthly chart hasn’t been closed below the 20-period EMA since late 2018. If the price stays above the $1685 swing low of July 2021 there is a real chance that the momentum will slowly keep nudging this asset higher.
Having a bullish long-term bias and a tight range on the intraday time frames, we can use this to our advantage by buying the dips and selling the rallies. A mean reversion technique would be to simply buy when an oscillator like the RSI signaled an oversold condition and then sell when the same indicator was signaling an overbought condition. By keeping with the monthly bias, buying should keep the drawdown to a minimum, and taking profits on the rally should be a way to accumulate wins under these conditions. Just keep an eye out for reasons to switch from mean-reversion trading to following a trend.