By Sean Lusk Dec 01, 2016 12:31AM ET
The common thinking in the marketplace following the Trump victory was that gold and silver would be two of the beneficiaries of higher prices and increased interest among traditional safe havens. Quite the opposite occurred as both the stock market and dollar index have been the big winners following the election, with the indices scoring all-time highs while the greenback hit multi-year highs.
There’s a common perception that the new administration will decrease corporate tax burdens and regulation on corporations following the inauguration in January and beyond. So far equity investors have been the big winners. The dollar rally comes on two fronts with one being a direct result of the withdrawal in the bond market while foreign investors continue to pour investment into the greenback eve as they are selling any rallies in the yen, euro, and the Aussie dollar to name just a few. The safe haven investment that precious metal bulls hoped would follow the Presidential election surprise has only been met with longs liquidating a once significant position.
From last December’s low at 1044.5 to this year’s high up at 1377.5, the gold market has traded all the way down past the 50 percent retracement at 1211.4, and then down to the .38 Fibonacci retracement from last year’s low at 1172.0. I would caution that although we are staring at a quarter point rate hike soon in December, this is likely to be one-and-done tightening by the Fed until the new administration is in office and enacts legislation in its first 100 days. Near term I’m watching open interest decline for the precious metals, especially during this last $30.00 break in February futures which signifies long liquidation instead of new sellers emerging in the market. Non commercial and non-reportable came in with a net long of 185K contracts. This is significantly down from a late summer high of 362K longs in the market. So the pairing of long positions has reached almost half the summer high.
Equities have made an impressive move post election, but what’s next to drive them higher aside from the Santa rally? Fourth quarter earnings aren’t due out for a while and holiday shopping numbers are in their infancy. I look for the Fed to also come out sounding more hawkish at their December meeting which could put a floor in gold’s prices as we enter into 2017.
Those looking for a trade may consider the following. Using June 2017 options, consider buying the June 1300 2017 call while selling 2 June 2017 1000 puts for even money. This one-by-two call/put ratio has major risk to the downside as you are short puts at the $1000.00 strike basis June 2017 futures.