Gold-Price of Dollar Falls Despite Unusually High GDP Growth.

This past week was an exciting time to watch the dollar.

To refresh your memory, here is a chart of the dollar-price of gold over the past year, inverted to show the gold-price of the dollar.

dollar-1-year-10-29-16

The dollar has been in a downtrend all year, but has recently moved above its own 200-day EMA. If the downtrend continues, this is a good opportunity to sell dollars and buy gold.

Now let’s look a little closer.

dollar-gold-closeup-10-29-16

Beginning on the 19th, sellers began trying to push the dollar back below its own 200-day EMA. By this past Tuesday, the 25th, they managed to get the price to close below this line of support.

Then on Friday, U.S. GDP growth numbers came out at 2.9%, slightly above the consensus estimate of 2.5% and well above the 1% or so of the previous two quarters. This should have caused the dollar to bounce back. But instead, the dollar closed even further below its previous low from Tuesday.

This is a very bearish sign for the dollar, and shows further evidence that the downtrend in gold prices is probably in the process of reversing.

Now let’s look at this again, but with shorter-term EMAs.

dollar-gold-with-21-ema-10-29-16

On Friday, sellers tried to push the dollar below its 21-day EMA. But they failed, and it ended up closing right on the line.

Time is running out to buy gold cheaply. In the past three weeks, its dollar-price has risen by about 27$/oz. Luckily, the 21-day EMA is presently acting as resistance, preventing the dollar from falling further. But it probably won’t last long.

Now is still not a good time to make a short-term trade, either by buying dollars or buying gold. The range in which the dollar/gold is trading is too narrow, making the risk not worth the reward.

So what about gold-mining stocks?

In last week’s post, I suggested a possible GDX trade with a 2:1 reward/risk ratio.

However, after publishing that post, I later realized that I had made a mistake. The stop-loss I suggested was unnecessarily wide, and this forced me to suggest selling half of the stock when it reached the next point of resistance. This made the trade more complicated than it needed to be and probably less profitable.

Since that time, the gold-price of a share of GDX has moved down from around 19.5 mAU (0.0195 oz.) to about 18.6, still close to the 19 mAU approximate price I cited in the earlier trade.

You can still continue the earlier version of the trade if you already opened the position or if you simply like having a wider stop. But I want to present an amended version that is less risky.

Here is the chart for Van Eck Vectors Gold Miners ETF, priced in gold, along with instructions for a possible trade.

gdx-gold-10-29-16

  1. Sell 33% of your gold account and buy as many shares of GDX as you can get. For example, 33% of a 2,000 mAU (2 Troy ounces) account is 660mAU (0.66 oz.). At the current price of 19 mAU per share, this would allow you to buy 34-35 shares, depending on whether you round up.
  2. If the gold-price of GDX falls to 17 mAU per share, sell all of your GDX shares and buy gold. In the example above, at a price of 17 mAU per share, 34 shares will allow you to buy 595 mAU (0.595 oz.) for a loss of 65 mAU (0.065 oz.) or $82.94 worth of gold. This is only a loss of 3.25% of the account.
  3. If the GDX price rises to its previous high of 23 mAU, sell all of your GDX shares and buy as much gold as you can with the cash you get in exchange. In the example above, 34 shares would allow you to buy 782 mAU (0.782 oz.). This would give you a profit of 122 mAU or about $155 worth of gold. On a 2 ounce account, this is a 6.1% return, for a reward/risk ratio of around 2:1.

Over the next few months, I will track this trade and write about it as it unfolds.