A little over a month ago I analyzed the gold market, highlighting the range between $1,900 and $1,500 that prices have been stuck in since mid-2011. You can reread that article here.
I also mentioned a simple mean-reversion strategy that took advantage of gold’s tendency to hop above and below the $1,700 mid-point of this range. In October, the historical profits provided by this strategy were $515,820.
Today I have an update…
The week after writing the original article gold futures closed below $1,700. And according to my simple rules, that meant short trades should be covered.
The system sold a total of eight futures contracts during the eight weeks that gold traded above $1,700. Remember, this strategy “fades” the market with the expectation that prices will reverse back to the average ($1,700 in this case).
Closing out these eight short positions added another $61,840 in profits to the strategy.
Then, the system called for us to buy one gold contract on November 5. One week later, gold prices hopped back above $1,700 and that one long trade was exited for another $5,510 profit.
Finally, four new short positions were established over the last four weeks, as gold held above our $1,700 threshold. These positions are doing well, as gold is now below $1,700 as I write.
Here’s a chart of gold futures prices with a “trend” indicator at the bottom:
The “trend” indicator still displays a very low value, suggesting the congestion phase gold is stuck in will persist. This is the perfect environment for a mean-reversion strategy like the one I’ve suggested.
Technically speaking, I’m still bearish on gold prices. The recent rally above $1,700 was very short-lived and failed to make a new high. I’ve highlighted the recent “lower high” with a red circle in the chart above. This suggests gold bulls are weak and can’t muster a strong rally.
Looking ahead, if gold breaks below about $1,670 I think it could go as low as $1,550 before finding any meaningful support again. Over the longer-term, we continue to see $750 in gold’s future.
At any rate, if gold closes below $1,700 at the end of this week we’ll have more profits to report. I’ll keep an eye on this…
If you haven’t done so already read the Survive & Prosper issue on “Economists Just Don’t Grasp the Power of Demographics.“