Options Theory Blog: Gold Gets Wrecked. Now What?
June 17, 2021
The story of the day has to be gold and the broader precious metals space. Though yesterday’s Fed announcement was largely shrugged off by equities, it had a massive impact on the currency market. And, like it or not, gold’s fate is tied to that of the U.S. dollar. Perhaps not on a daily basis or during minor moves, mind you. But when you get the type of jump we’ve seen in the greenback this week, you better believe it’s going to impact gold and friends.
Let’s start with the chart of UUP – the Dollar ETF.
Note the sharp volume spike and epic upside breakout. If you’re looking for a reason why, it’s probably as simple as the Fed moving up their timeline for a rate hike. Generally, rising rates is bullish for the buck.
And a bullish dollar is kryptonite for gold. The best way to view the correlation between the two is with a chart overlay like this one. Gold is represented by the yellow line chart. The candlestick chart is the U.S. dollar. Note how their major turning points came at identical times.
The damage hasn’t been isolated to precious metals today. You’re seeing destruction across everything related to commodities.
You might be wondering how to proceed with gold. Let’s discuss.
First off, deciding how you’re going to manage a trade or investment in the middle of a crash is a terrible idea. You’ll be overly emotional and probably make the wrong decision. How you respond to this week’s bloodbath should depend solely on what type of plan you mapped out at the outset of your position.
Managing a short-term trade in gold will differ from managing a long-term investment.
Short-term Trade
GLD has broken multiple support zones, including all major moving averages. Sure, it sucks that today’s loss came courtesy of a large down gap, but sometimes that happens. The only reason I could see someone not getting stopped out today is if they originally planned on bailing below the 50-day moving average, but wanted to wait to see if today’s down gap signaled capitulation.
Sometimes on large gap days, I wait a bit and let prices settle to see if we will fill the gap or continue falling. I like using today’s low as a new stop point. That way, you give GLD a chance to recover, but don’t lose much more if we keep pushing lower.
Long-term Investment
If you bought GLD as part of a diversified long-term portfolio to hedge inflation, then I don’t see how this week’s downdraft changes a thing. If you’re not willing to sit through the occasional 10%+ drawdown in an asset then you’re never going to own anything for the long run. You’ll get shaken out multiple times along the way.
At some point this correction will create a buying opportunity. They always do.
Read more Options Theory [FREE Content]
Every Thursday our resident options addict, Tyler Craig, will be at the helm to help you demystify derivatives and better understand what truly makes them tick. Options for beginners? Come this way, please. Enlightenment awaits.
Financial freedom is a journey
Sign up now and gain unfettered access to all of the quality content and powerful Scouting Reports that our Pro Members enjoy for 15-days absolutely free with no strings attached and let us show you what your trading has been missing.
Legal Disclaimer
Tackle Trading LLC (“Tackle Trading”) is providing this website and any related materials, including newsletters, blog posts, videos, social media postings and any other communications (collectively, the “Materials”) on an “as-is” basis. This means that although Tackle Trading strives to make the information accurate, thorough and current, neither Tackle Trading nor the author(s) of the Materials or the moderators guarantee or warrant the Materials or accept liability for any damage, loss or expense arising from the use of the Materials, whether based in tort, contract, or otherwise. Tackle Trading is providing the Materials for educational purposes only. We are not providing legal, accounting, or financial advisory services, and this is not a solicitation or recommendation to buy or sell any stocks, options, or other financial instruments or investments. Examples that address specific assets, stocks, options or other financial instrument transactions are for illustrative purposes only and are not intended to represent specific trades or transactions that we have conducted. In fact, for the purpose of illustration, we may use examples that are different from or contrary to transactions we have conducted or positions we hold. Furthermore, this website and any information or training herein are not intended as a solicitation for any future relationship, business or otherwise, between the users and the moderators. No express or implied warranties are being made with respect to these services and products. By using the Materials, each user agrees to indemnify and hold Tackle Trading harmless from all losses, expenses and costs, including reasonable attorneys’ fees, arising out of or resulting from user’s use of the Materials. In no event shall Tackle Trading or the author(s) or moderators be liable for any direct, special, consequential or incidental damages arising out of or related to the Materials. If this limitation on damages is not enforceable in some states, the total amount of Tackle Trading’s liability to the user or others shall not exceed the amount paid by the user for such Materials.
All investing and trading in the securities market involves a high degree of risk. Any decisions to place trades in the financial markets, including trading in stocks, options or other financial instruments, is a personal decision that should only be made after conducting thorough independent research, including a personal risk and financial assessment, and prior consultation with the user’s investment, legal, tax and accounting advisers, to determine whether such trading or investment is appropriate for that user.
