How To Trade Through The Fog Of War. Part 2: Gold
Crude oil wasn’t the only market affected by the fog of war yesterday. Gold, equities, and the USD all experienced the same violent reversals, albeit to different degrees.
As with our discussion on oil, focusing on the trend, instead of headlines, is what will get you through this volatile time.
Here’s a chart of gold.
Gold went on a more heartstopping ride yesterday than oil, trading between a high of $1976 and a low of $1878, for an intraday range of almost $100.
Naturally, as it almost always is with gold, the large move higher was attributed to “haven” demand.
That is, investors were supposedly rushing to purchase the precious metal because it is thought of as a “safe” asset to be held in times of uncertainty.
While this would definitely be the case for Ukrainians in the midst of war, it is far less so for other investors. A more accurate description would perhaps be that investors were rushing to purchase gold because other investors were doing so.
In other words, a lot of the price move was probably driven by folks thinking in the 2nd degree.
That is, they were thinking something along the lines of: if people rush in to buy gold because of the war (i.e. trading on the Event), then I should buy gold too and let these folks drive up the price for me before exiting.
This sort of thinking and trading activity is the physical action behind the time worn adage “buy the rumor, sell the news”.
Which is exactly what happened yesterday.
Gold first got bid up above $1900 last week, and hovered around the area before blasting off to $1976 yesterday as Russian tanks rolled into Ukraine.
Whereupon gold promptly fell… all the way back to the $1880 region.
If gold were truly being bid up as a safe haven, no one would be selling it.
What happened in gold yesterday, as breathtaking as it was (or heartstopping, depending on your perspective), is a demonstration of market participants trading on Events, with their actions driving immense amounts of volatility.
What’s of true importance in trading gold is not the war (again, not unless you’re a Ukrainian in the war zone), but the trend.
From the chart, we can see that gold has been in an uptrend for the last 2 years. As a matter of fact, if you pull up a longer term chart, you will see that gold has been trending higher for about the last 14 years, since the Great Financial Crisis in ‘08.
Whatever factors are driving gold higher, the yellow metal is very clearly in a multi-year bull market. This alone should indicate to you that the path of least resistance here is to be long gold.
Back in ‘08, gold made a bottom at approximately $900, and hit a high of about $2100 in 2020. In this context, yesterday’s $100 swing isn’t really that big of a deal.
As such, if you find yourself worrying about the future direction of gold after yesterday’s swing and need some direction on how to position yourself, focus on the trend!
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