“Trump Effect” Provides Opportunity for Short-Term Gold Trade.

Last week, I stated that the fall in the gold-price of the dollar was “a very bearish sign” for it. At that time, the price of the dollar was around 0.024 grams of gold. Now it has fallen all the way down to 0.023 grams.

This is despite the fact that some good jobs data came out on Friday, which should have caused the dollar to rally.

So what happened?

The only explanation that anyone has been able to come up with is that gold is rising because the F.B.I has reopened its investigation of Hillary Clinton, causing her to fall in the polls and opening up the possibility of Donald Trump winning the Presidency. Supposedly, this is causing investors to fear a trade war with China and a slowing of the global economy. As a result, they are flocking to the “safe haven” of gold.

I tend to be pretty skeptical of short-term explanations like this one that rely upon psychological or social theories rather than charts and price-action.

For example, in this case, I think gold has been extremely undervalued for the past few weeks while the stock market has been overvalued. As evidence for this view, I would point out that gold has only recently gotten back above its 200-day EMA, even though it had been in an uptrend the whole year before falling in October. The stock market, by contrast, has been falling in gold terms all year, but had just recently risen above its own 200-day EMA. So it should be no surprise that investors were looking for an excuse to sell stocks and buy gold.

Having said this, however, I do have to admit that there is something to the “Trump Effect” theory. The pace of the rise in gold (or fall in the dollar) this past week has been rapid. So I do¬†think that Trump is speeding up the already existing trend towards selling stocks for gold.

So how can we take advantage of this?

Take a look at this chart of the past six months of gold priced in the U.S. Dollar.

xau-usd-11-5-16

The two horizontal red lines represent a range that gold was trading in prior to its October 4 fall. it is now on the verge of breaking back into that range again. If it has a daily close above the bottom red line at $1307.74/Oz., it is likely to climb all the way up to the top of the range at $1367.43.

Now here is the same image using the Fotis Risk-Management Tool.

xau-usd-fotis-11-5-16

If we buy gold right as it moves above the bottom of the range – and place our stop-loss at 1293.16 (where the 100 EMA is), we can risk 5% of our account for a chance to make 20%. This is an incredible deal, and chances like this don’t come around very often.

Of course, this is assuming that the price breaks above $1307.74 and that either Trump wins the election or else that the election is too close to call and we end up with chaos.

Even if the price breaks above the bottom of the range, a clear Clinton win will probably move it back down again. Still, a 5% risk for a 20% gain is hard to pass up.

So what about our GDX trade from last week?

gdx-gold-11-5-16

It’s essentially going no where. Maybe by next week it will have broken out and done something interesting.

Have fun trading gold this week. It’s going to be a wild ride.