August 22, 2020 | Trading Desk Notes August 22, 2020

The news that “Buffet Buys Barrick Shares” spurred gold to rally more than $70 from last week’s close to Tuesday’s highs…the US Dollar Index falling to new 2 year lows also buoyed gold. We shorted gold on that rally and bought the US Dollar against the Euro currency.

We covered a short gold position last week for a gain of ~$100 and were looking for a bounce this week to get short again. The Buffet/Barrick news and the weaker USD set up the opportunity. Our view has been that the $500+ rally in gold since March was WAY overdone and was driven by massive buying of American gold ETFs. Last week (ending Aug 14) saw the first net sales of American gold ETFs after 20 consecutive weeks of net buying.

The US Dollar weakness story has been predominately a “Euro strength” story with the EURUSD up ~11% from the May lows to this week’s highs. Our view has been that the Euro rally was WAY overdone with All Time Record net speculative long positions in the futures market.

The crude oil market is a lack-of-demand story. We established bearish WTI contango spreads about 6 weeks ago (short Dec/Long Mar) and added to that trade 2 weeks ago. If front month WTI drops below $40 those spreads will likely widen sharply. (This chart shows Dec trading at a discount of ~25 cents to Mar in early July. The spread is now ~83 cents. This change represents an unrealized gain of ~$580 per spread.)

The S+P 500 index hit All Time Highs this week…powered by mega-cap tech. (FB, AMZN, AAPL, MSFT and GOOG are up ~35% YTD while the other 495 stocks are down ~5% YTD.) A couple of months ago our view was that the bounce off the March lows was a bear market rally. We were wrong and thankfully we didn’t lose much money on that idea. We now think that the tech rally is WAY overdone…AAPL hit a $2 Trillion market cap this week…the share price and the P/E ratio have doubled since March. Tesla shares have increased tenfold in the last 12 months. Both AAPL and TSLA are rallying ahead of share splits which commence trading Aug 31.

Lumber continues to soar as near term demand outstrips supply. American existing home sales continues to soar while the median countrywide selling price has surged above $300,000 (up ~8.5% YoY) for the first time ever.

Our short term trading: We take positions in the futures/options market looking for “prices” to move in our favor within the next few days/next few weeks. We form a “background” view on markets and then look for a catalyst or trigger to initiate a position. The catalyst could be the market’s reaction to some “news” (like the gold bounce on the Buffet story) while a trigger is more likely prices breaking/reaching a chart point.

We like to enter a trade where we think we have a chance of making at least 3 times as much as we are risking on the trade. We generally will not risk more than 1% of trading capital on a trade. If a market moves in our favor we like to move stops to breakeven as quickly as possible but will also look to add additional positions.

If you’d like to know more about using the futures and options market to trade currencies, metals, interest rates, stock indices, energy and other commodities please contact Drew Zimmerman at PI Financial Corp in Vancouver.

PI Financial Corp. is a Member of the Canadian Investor Protection Fund. The risk of loss in trading commodity interests can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. In considering whether to trade or the authorize someone else to trade for you, you should be aware of the following. If you purchase a commodity option you may sustain a total loss of the premium and of all transaction costs. If you purchase or sell a commodity futures contract or sell a commodity option or engage in off-exchange foreign currency trading you may sustain a total loss of the initial margin funds or security deposit and any additional fund that you deposit with your broker to establish or maintain your position. You may be called upon by your broker to deposit a substantial amount of additional margin funds, on short notice, in order to maintain your position. If you do not provide the requested funds within the prescribe time, your position may be liquidated at a loss, and you will be liable for any resulting deficit in your account. Under certain market conditions, you may find it difficult to impossible to liquidate a position. This is intended for distribution in those jurisdictions where PI Financial Corp. is registered as an advisor or a dealer in securities and/or futures and options. Any distribution or dissemination of this in any other jurisdiction is strictly prohibited. Past performance is not necessarily indicative of future results

Victor Adair August 22nd, 2020

Posted In: Victor Adair Blog

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