Saxo G20 Risk Radar: October 15, 2018
The latest edition of Saxo's G20 risk radar places Brexit and the Sino-US trade war in focus on troubled negotiations and the upcoming G20 summit.
Global Macro Strategist
Price Target: $15.78/oz
Market Price: $16.4438/oz
UPDATE: This is an update to the original trade view that was posted on June 04, 2018. We're closing out the shorting precious metals into the Fed play, with spot gold closed out $1,294/oz and spot silver at $16.85/oz.
Despite the previous 5/6 and 6/6 trading patter we saw with gold and silver selling off into a Fed hike meeting…the trade has been a dud this time around.
Gold is pretty much at break-even and silver had a very good grind up. I will cover this in fuller detail when I am back on deck on next week’s Macro Monday, which will be run out of Sydney.
More importantly, I think the market is sleeping on this very hawkish upgrade we just got from the Fed’s Powell. We are now at four rate hikes for this year and must take the classic “remain low for a while”. At the same time from Jan 2019 every Fed meeting will have a press conference (i.e. double the present amount). Governor Powell obviously played this down, but it does turn every meeting into a live meeting.
I think the market is ignoring the significance of this Powell upgrade. Remember he could EASILY have waited to upgrade the market for a September hike later in the summer (July/August).
I think we should be much higher on US bond yields and the USD, and lower in gold and silver. What is definitely reacting is Federal Funds Futures, we have Jan 2020s at 97.265. Still, the market is acting as if this is a one and done.
Here are links to FOMC:
Original trade view as posted on June 04:
We're adding to our tactical gold shorts into the next Fed hike (June 13) with new short silver positions.
This is at 1x capital, so $10m, entry at $16.41/oz with a target at $15.78/oz as well as a time stop of June 14 – the day after the rate hike. Watching gold for signs of this trade idea being wrong, gold closed on Friday at $1293.40/oz... a retracement back above $1330/oz would change the bearish technicals and momentum that have recently plagued the shiny yellow metal.
Overview of this gold and silver pattern in the current hiking regime...
– The average performance of gold going into the Fed hike meetings has been -$23.37 or -1.97%
– This would give gold, which closed at $1293.40/oz last Friday: an implied range of $1298.50/oz to $1244.47/oz, with $1270.03/oz being the avg. implied price, a -1.81% move from Friday.
– To put it another way, based on historical data points, the implied move on gold is from +0.39% to -3.78% from $1293.40/oz until the close of Thursday Jun 14.
– Gold has traded lower 5 out of 6 times in this cycle so far, so shorts would have been right 83% of the time for an implied skew of 6.3x (average down move / average up move)
– The average performance of silver going into the Fed hike meetings has been -$0.64 or -3.86%
– This would give silver, which closed at $16.41/oz last Friday: an implied range of $16.21/oz to $15.57/oz, with $15.78/oz being the average implied price, a -3.88% move from Friday.
– To put it another way, based on historical data points, the implied move on silver is from -1.20% to -5.10% from $16.41/oz until the close of Thursday Jun 14.
– Silver has traded lower 6 out of 6 times in this cycle so far, so shorts would have been right 100% of the time.
– A tactical trade view with short gold and silver exposures look compelling, whether expressed outright, or through buying puts and put spreads on the precious metals. The Fed is the key event around this and the Jun 14 date acts as a time stop on the trade view.
– Geopolitical risks in Europe [In fact our Chief Economist & CIO Jakobsen put a long gold / short USD trade on Spanish political risks] as well as the Korean peninsula escalating over the next 10 days.
– Potential risk-off driven by confusion over potential trade war fears – here we go again!
– A weaker USD and/or lower US yields could give the precious metals a bid.
– The Fed chooses not to hike – highly improbable, yet a good trader must envisage all potential pathways.
– From a technical analysis view, any sustained gold squeezes that take us back above $1330/oz, potentially could reverse the bearish indicators and technicals we are going through.
– Historical patterns come and go in the markets.
Stop: This is a NAV trade and is at 1x capital, so $10m
Target: c. $15.78/oz
Time Horizon: c. $15.78/oz