Many investors are now thinking that turmoil in the Middle East might give gold a boost. But anyone who pins a trading strategy to the ups-and-downs of geopolitics is embarking on a fool’s errand.
The trading strategy I use in my two investment services, Douglas Davenport’s All-Weather Investor and Inflation Survival Strategy, is based on trend-following.
I developed the model that generates my “buy” and “sell” recommendations with my mentor, the late Sir John Templeton. During that process, we agreed that the trading model must limit itself to a systematic study of technical indicators. In other words, we decided not to watch the headlines.
That directive came to mind last week as I watched gold prices bounce around. The precious metal had been trading at a premium amid expectations that a U.S.-led attack on Syria was imminent. But after President Obama decided to seek Congressional approval for airstrikes and last week’s G-20 meeting ended without a resolution of the debate, the Syria premium on gold disappeared.
Prices dipped below the $1,380 support level, and eventually fell all the way to the 50-day moving average, at around $1,358 per ounce. But gold bulls returned, sparking a rally that helped the precious metal jump by $33 an ounce and close out the week at $1,391.
Gold and Geopolitics
Let’s be honest: Obama’s handling of the Syria situation has been buffoonish. Russian President Vladimir Putin has outmaneuvered him and effectively stymied any attempt at consensus among the international community. Personally, I never thought I’d live to see the day in which Russia’s leader inspired more confidence than our own.
|Gold’s intermediate-term uptrend may now be in danger. And it has nothing to do with geopolitics.|
But, ultimately, the political machinations that dictate U.S.-Russian relations are peripheral to the Syria situation, and its effect on gold prices. What does matter is whether, and when, the airstrikes on Bashar al-Assad’s regime actually happen.
I have no interest in trying to answer those questions, and neither should any serious investor. Geopolitical events can change rapidly, and any gains achieved through predicting those events can evaporate in an instant. Traders who choose to go this route must be nimble and have their ears to the ground at all times.
I decided a long time ago that I wouldn’t play that game. I’ve never been interested in trading in and out of the market on a daily basis in order to grab every dollar possible. Instead, I try to identify intermediate- and long-term trends, which return far greater profits over time.
Gold and Interest Rates
Several weeks ago, I told subscribers to both of my investment services to go long on gold. That recommendation has proven to be profitable. What’s more important, it had nothing to do with the turmoil in Syria, and everything to do with the technical strength underpinning the gold market.
However, gold’s intermediate-term uptrend may now be in danger. And, again, it has nothing to do with geopolitics. As technical analysts, we force ourselves to look beyond the obvious, headline-driven factors for market moves. When it comes to gold, we don’t have to look any further than the Federal Reserve.
If the U.S. economy continues to improve, many investors believe the Fed will begin to taper its quantitative-easing program before the end of the year. To do that, the central bank will sell Treasuries and other securities, driving interest rates higher. And, of course, rising rates produce downward pressure on gold, along with upward pressure on the U.S. dollar.
To see this relationship in action, take a look at the recent movement in the 10-year Treasury note.
As you can see, the yield has been rising steadily, finally climbing to within 20 basis points of 3 percent last week. It hasn’t been this high since July 2011, more than two years ago. As for my trading model, this is a much more important reason for gold’s recent stumble than the latest news from Syria.
Don’t get me wrong — I’m not saying that interest rates will definitely continue to rise, or that gold will definitely continue to fall. But with traders seemingly intent on reacting to every bit of economic data and geopolitical news, it’s a good bet that the volatility in the gold market won’t go away any time soon.
It should be obvious by now that this is not an easy market in which to trade. But no one ever said trading was easy; if it were, we would all be busy counting our money on a tropical isle somewhere.