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Options Theory Blog: Gold Gets Wrecked. Now What?

June 17, 2021

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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.

$UUP chart

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.

$UUP chart

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.

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