An Update on Gold Profits

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:

See larger image

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.



Adam O’Dell

Using his perfect blend of technical and fundamental analysis, Adam uncovers investment opportunities that return the maximum profit with minimum risk.