The gold bubble and blow off thesis.
מעודכן
Classic Bubble Chart:
Have a look at the gold chart shown in the OP and then have a look at this chart.
Or this one.
What do the two charts here have in common? You could have made a lot of money if you knew to fade the false breakout.
The corelation between the overall gold chart and these bubble top charts is very high.
But The Dollar is Dying!
Is it, though?
I remember people presenting long metals thesis' because the dollar was dying in 2011. Since this time, the USD has actually uptrended vrs major currencies. Granted, there's been about a 30% reduction in USD spending power over this time but that's not translated to gold gains, has it?
If you went long gold in 2011 after a decade your high water mark return would have been 10%. Half of that return was in the one hour spike that happened recently and this did not sustain even a full hour. On the other side of it, you'd have experienced a 50% drawdown which actually is a larger loss than the decreased spending power it was meant to hedge.
In the Forex markets, the USD has been strong all this time. Since 2007 DXY has drew down 10% only three times and never greatly exceeded this drawdown. To put this into context against gold, gold has drew down over 10% more times in just the last three years. The risk adjusted return long USD vrs major currencies beats long gold on all metrics.
What if the USD has been carving out a low? Maybe the drop that started in 1984 ended in 2007. Perhaps we're setting up to correct a large chunk of this drop.
But Cash is Trash!
Is it, though? Are we not in the midst of the fastest series of rate hikes in history from the FED? Why should this not reflect itself in a stronger USD? Isn't it possible the slow creeping trend we have seen in the USD over the last decade or so is now strongly fundamentally supported and can enter into a stage of over-performance?
But Gold Protects Again Inflation.
Even if we give gold full credit as an inflation hedge (And as I've covered already that's dubious) - who's to say inflation will go on forever? Like, does that actually make sense?
Inflation has historically always been mean reverting. There are periods of inflation and periods of deflation. If we've went through a record upswing in inflation and we're inside a record hiking of interest rates does it not stand to reason that the outlook for the coming years would have room for deflation?
Deflation seems like a mythical being. A relic of the past. But maybe this is just recency bias. People think inflation can be allowed to run rampant forever to protect the indices market. That really does not make sense. The mandate of the FED is to keep monetary policy sustainable. Not to make the market a free lunch.
I can't say I have any strong thoughts one way or the other on what the FED wants or what it will do to meet its ends. It just seems silly to me to think the only thing in their playbook is to run the currency into the ground, creating all sorts of major problems, just so people who take excessive risks in the market feel no pain.
For all we know, the FED might be setting up to do something similar to the BoJ. Inflate the bubble and then intentionally pop it. If we listen to what the FED are saying (And that might not be wise - CB's are like nappies) they're actually saying things more in line with deflation than inflation.
The Gold Bull Case is Largely Rhetoric Based
People talk more about what they think gold should be than what it really is. I'm not going to go down the line of "Useless shiny rock" - I'm just talking about the historic performance of gold.
It's been a mildly effective hedge against inflation, but you'd have done far better just being long stocks. When it comes to a hedge against market crashes it has been largely ineffective. Gold has crashed along with stocks multiple times and in the times it did not is mostly traded flat.
The historically profitable play on gold when it comes to market crashes has been to buy it once the crash is over. Gold has a faster recovery rate than stocks under these conditions.
In 2020 gold had strong correlation to stocks. When stocks first began to slide gold initially spiked but this was the high and it dropped about the same percentage as SPX did.
And if you bought gold to hedge yourself in 2008 you got essentially the exact same performance as SPX.
Markets Are Liquidity Seeking
Most people lose their money in markets at the extremes. People get blown out their shorts at the highs, blown out their longs at the lows and are induced to "Follow the trend" when the trend is ending.
We can sometimes make reasonably good forecasts on markets simply by asking ourselves where the liquidity pools are. And where would these be on gold? Where do you think the gold bears had their stop losses? What sort of action do you think it would take to make them panic and puke their shorts?
Seems pretty obvious to me.
And where would gold be best to trade to catch people out on the other side? Again, this seems very obvious to me.
The Blow Off Thesis
Trends usually end spectacularly. With excessively large moves in the direction of the trend and then back against it. These sharp moves usually end up expressing themselves as large wicks on bigger charts.
During the few hours of the spike and rejection on Monday, gold traded a 10% range. Moved over 10% net in under 10 hours.
From 2015 to the current price gold is up around 100%. Over the last 8 years gold has an average annual gain of 12%. And then we did 5% in 30 minutes. A little suspicious, no?
The gloating of gold bulls during this fractionally small window of time the move was near the high was palpable. Gold was in "Price discovery". The most "Significant breakout of our time". 45 minutes later, it was back where it started. Now a few days later it's dropped 100% more than the full spike.
Bulls who were smart and trailed their stops when this happened did well. Those who went on a gloating tour has barely had time to finish writing up their posts before the whole move and then some was rejected.
Maybe that was the top.
Tactical Considerations and Risks for Bears
I personally feel far more comfortable shorting gold now there's been a big spike. I've been wanting to giga-short gold for literally the last few years while it's held this range but I know what it looks like when you're 95% right on these things - you get absolutely hammered in the final move before you're actually right.
Now we have this big spike in, I am far happier. My gold positions are now over five times as big as they were previously. If the bear thesis is correct the stops have been ran and it's now safe(er) to bet on. Often after a squeeze like this the market will just steadily bleed out. Those trapped in the wick are trapped and get no relief.
As such, I am actively shorting gold now. Entering into rallies on resistances. Looking for bear break levels. Building up a position and diligently trailing stops to get out early if something unexpected happens. I'll continue to do this while it's easy. If we're in the bleed out it should be like shooting fish in a barrel.
The risk for bears (And I'd say the best possible opportunity for bears) is we complete a classic bull trap rally now. Taking us back to 2120 or so before it's time for the easy short.
My plan for now is to follow the bear trend while it does not fight me much but if it does start to fight me get out my shorts and prep for the bull trap trade.
Any major and sustained trading at new highs would annul my hypothesis here. I may or may not be interested in shorting higher if there's another spike but as things stand my thesis is very much that gold has just completed a blow off top. Those who are in the wick are not going to see their entry price again.
Failure of that would require a full review.
I've only traded gold here and there over the last 3 years. It's been the great sideways and I've always thought it will be so easy to make money (On either side) once that is over I might as well be patient and be ready to fully hit it when the range is over. I suspect we may now be approaching the end of the range.
I am ready to aggressively build up a short position in gold if we get suitable price action for it.
Have a look at the gold chart shown in the OP and then have a look at this chart.
Or this one.
What do the two charts here have in common? You could have made a lot of money if you knew to fade the false breakout.
The corelation between the overall gold chart and these bubble top charts is very high.
But The Dollar is Dying!
Is it, though?
I remember people presenting long metals thesis' because the dollar was dying in 2011. Since this time, the USD has actually uptrended vrs major currencies. Granted, there's been about a 30% reduction in USD spending power over this time but that's not translated to gold gains, has it?
If you went long gold in 2011 after a decade your high water mark return would have been 10%. Half of that return was in the one hour spike that happened recently and this did not sustain even a full hour. On the other side of it, you'd have experienced a 50% drawdown which actually is a larger loss than the decreased spending power it was meant to hedge.
In the Forex markets, the USD has been strong all this time. Since 2007 DXY has drew down 10% only three times and never greatly exceeded this drawdown. To put this into context against gold, gold has drew down over 10% more times in just the last three years. The risk adjusted return long USD vrs major currencies beats long gold on all metrics.
What if the USD has been carving out a low? Maybe the drop that started in 1984 ended in 2007. Perhaps we're setting up to correct a large chunk of this drop.
But Cash is Trash!
Is it, though? Are we not in the midst of the fastest series of rate hikes in history from the FED? Why should this not reflect itself in a stronger USD? Isn't it possible the slow creeping trend we have seen in the USD over the last decade or so is now strongly fundamentally supported and can enter into a stage of over-performance?
But Gold Protects Again Inflation.
Even if we give gold full credit as an inflation hedge (And as I've covered already that's dubious) - who's to say inflation will go on forever? Like, does that actually make sense?
Inflation has historically always been mean reverting. There are periods of inflation and periods of deflation. If we've went through a record upswing in inflation and we're inside a record hiking of interest rates does it not stand to reason that the outlook for the coming years would have room for deflation?
Deflation seems like a mythical being. A relic of the past. But maybe this is just recency bias. People think inflation can be allowed to run rampant forever to protect the indices market. That really does not make sense. The mandate of the FED is to keep monetary policy sustainable. Not to make the market a free lunch.
I can't say I have any strong thoughts one way or the other on what the FED wants or what it will do to meet its ends. It just seems silly to me to think the only thing in their playbook is to run the currency into the ground, creating all sorts of major problems, just so people who take excessive risks in the market feel no pain.
For all we know, the FED might be setting up to do something similar to the BoJ. Inflate the bubble and then intentionally pop it. If we listen to what the FED are saying (And that might not be wise - CB's are like nappies) they're actually saying things more in line with deflation than inflation.
The Gold Bull Case is Largely Rhetoric Based
People talk more about what they think gold should be than what it really is. I'm not going to go down the line of "Useless shiny rock" - I'm just talking about the historic performance of gold.
It's been a mildly effective hedge against inflation, but you'd have done far better just being long stocks. When it comes to a hedge against market crashes it has been largely ineffective. Gold has crashed along with stocks multiple times and in the times it did not is mostly traded flat.
The historically profitable play on gold when it comes to market crashes has been to buy it once the crash is over. Gold has a faster recovery rate than stocks under these conditions.
In 2020 gold had strong correlation to stocks. When stocks first began to slide gold initially spiked but this was the high and it dropped about the same percentage as SPX did.
And if you bought gold to hedge yourself in 2008 you got essentially the exact same performance as SPX.
Markets Are Liquidity Seeking
Most people lose their money in markets at the extremes. People get blown out their shorts at the highs, blown out their longs at the lows and are induced to "Follow the trend" when the trend is ending.
We can sometimes make reasonably good forecasts on markets simply by asking ourselves where the liquidity pools are. And where would these be on gold? Where do you think the gold bears had their stop losses? What sort of action do you think it would take to make them panic and puke their shorts?
Seems pretty obvious to me.
And where would gold be best to trade to catch people out on the other side? Again, this seems very obvious to me.
The Blow Off Thesis
Trends usually end spectacularly. With excessively large moves in the direction of the trend and then back against it. These sharp moves usually end up expressing themselves as large wicks on bigger charts.
During the few hours of the spike and rejection on Monday, gold traded a 10% range. Moved over 10% net in under 10 hours.
From 2015 to the current price gold is up around 100%. Over the last 8 years gold has an average annual gain of 12%. And then we did 5% in 30 minutes. A little suspicious, no?
The gloating of gold bulls during this fractionally small window of time the move was near the high was palpable. Gold was in "Price discovery". The most "Significant breakout of our time". 45 minutes later, it was back where it started. Now a few days later it's dropped 100% more than the full spike.
Bulls who were smart and trailed their stops when this happened did well. Those who went on a gloating tour has barely had time to finish writing up their posts before the whole move and then some was rejected.
Maybe that was the top.
Tactical Considerations and Risks for Bears
I personally feel far more comfortable shorting gold now there's been a big spike. I've been wanting to giga-short gold for literally the last few years while it's held this range but I know what it looks like when you're 95% right on these things - you get absolutely hammered in the final move before you're actually right.
Now we have this big spike in, I am far happier. My gold positions are now over five times as big as they were previously. If the bear thesis is correct the stops have been ran and it's now safe(er) to bet on. Often after a squeeze like this the market will just steadily bleed out. Those trapped in the wick are trapped and get no relief.
As such, I am actively shorting gold now. Entering into rallies on resistances. Looking for bear break levels. Building up a position and diligently trailing stops to get out early if something unexpected happens. I'll continue to do this while it's easy. If we're in the bleed out it should be like shooting fish in a barrel.
The risk for bears (And I'd say the best possible opportunity for bears) is we complete a classic bull trap rally now. Taking us back to 2120 or so before it's time for the easy short.
My plan for now is to follow the bear trend while it does not fight me much but if it does start to fight me get out my shorts and prep for the bull trap trade.
Any major and sustained trading at new highs would annul my hypothesis here. I may or may not be interested in shorting higher if there's another spike but as things stand my thesis is very much that gold has just completed a blow off top. Those who are in the wick are not going to see their entry price again.
Failure of that would require a full review.
I've only traded gold here and there over the last 3 years. It's been the great sideways and I've always thought it will be so easy to make money (On either side) once that is over I might as well be patient and be ready to fully hit it when the range is over. I suspect we may now be approaching the end of the range.
I am ready to aggressively build up a short position in gold if we get suitable price action for it.
הערה
Still ideally looking for entries for this around 2100.הערה
Here's the complimenting bullish USD thesis to support this. 
הערה
Gold retracement levels filled. 
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