Gold Is Rangebound, Here’s How to Trade it
As of early February 2022, gold prices are trading almost exactly where they were in February of 2021, but persistent sideways action might actually represent an opportunity.
Last February, the going price for an ounce of gold was around $1,800.
As of early February 2022, the going price for an ounce of gold remains around $1,800—or $1,801.13, to be exact.
That type of year-over-year movement probably makes gold an excellent candidate for the “least intriguing trade of the year.” But that’s only from a traditional long/short perspective.
In terms of the volatility trade, that type of movement (read: lack of movement) is ideal for short options/volatility players.
But how has gold performed more broadly—for instance, since the financial crisis?
Gold Performance Since the 2008-2009 Financial Crisis
During the 2008-2009 financial crisis, gold became one of the stars of the financial markets.
At the start of 2007, gold was trading for $650/oz. Only three years later, gold had nearly doubled—when it started the 2010 trading year at about $1,100/oz. By August 2011, the price had risen as high as $1,900/oz.
That means from January 2007 to August 2011, gold prices rallied 192%.
But as the world rebounded from the financial crisis, gold suffered a bear market. From 2011 to 2016, gold prices steadily declined from the aforementioned $1,900+/oz, all the way back down to $1,100/oz.
Gold didn’t find a strong bid again until the COVID-19 pandemic, when it once again rallied toward the $2,000/oz mark. But since summer 2021, gold has felt like dead money—at least from a directional standpoint—trading tightly between $1,750 and $1,850 per oz.
Is the Gold Trade Dead?
Considering gold’s meek performance over the last 12 months (basically flat), many have been asking of late if the gold trade is dead? And if so, why that might be?
One of the arguments for the lack of movement in gold has been attributed to the rise of the cryptocurrency sector.
And while some investors and traders have likely shifted from the gold market to the cryptocurrency market, daily trading volumes demonstrate that activity in the gold market remains robust.
For example, during 2019, gold ranked third amongst the leading global financial assets (by daily volume), behind government bonds and stocks. At that time, daily volume in the gold market averaged roughly $145 billion per day.
In 2021, that number rose to nearly $180 billion, indicating that interest in the gold markets remains very strong. Moreover, the market cap of the entire global gold market is estimated at around $11 trillion.
For context, daily trading volume in the cryptocurrency markets during 2021 was estimated to be roughly $70 billion by CoinMarketCap.com, while the overall market cap of the crypto universe is currently about $1.7 trillion.
These figures suggest that the precious metals and cryptocurrency sectors can coexist, at least for now.
Cloudy Outlook = Sideways Market
Like most things, sideways movement in gold prices during 2021 can probably be attributed to uncertainty in the global economy, as opposed to dying interest in the precious metals sector.
The world is two years deep into the COVID-19 pandemic, and uncertainty over its ultimate resolution remains. The recent surge of the Omicron variant has once again disrupted the functioning of the global economy, which makes economic/business projections very difficult to come by.
For these reasons, the outlook for gold prices remains cloudy—much like any other part of the financial markets. And that includes the cryptocurrency sector, which recently experienced a sharp correction.
Uncertainty in the gold market was illustrated quite clearly in early February when two of the larger banks on Wall Street issued conflicting outlooks for one of the world’s most recognized commodities.
For example, Goldman Sachs remains bullish on gold, and recently raised its 12-month outlook for the commodity—up to $2,150/oz from $2,000/oz. Interestingly, UBS took the opposite stance, projecting that gold prices could drop as low as $1,600/oz by the end of 2022.
Considering those widely divergent opinions on the future price of gold, it’s a little easier to see why the commodity continues to trade sideways—ultimately tying back to the lack of strong conviction on either side of the market.
That means sideways action in gold prices may persist, unless another global crisis unfolds—whether it be related to COVID-19, or rising tensions on the shared border between Russia and Ukraine.
To learn more about trading a sideways gold market, readers may want to review this previous Luckbox article. For more on the precious metals sector, this installment of Small Stakes on the tastytrade financial network is also recommended.
To follow everything moving the financial markets, readers can also tune into TASTYTRADE LIVE—weekdays from 7 a.m. to 4 p.m. CST—at their convenience.
Sage Anderson is a pseudonym. He’s an experienced trader of equity derivatives and has managed volatility-based portfolios as a former prop trading firm employee. He’s not an employee of Luckbox, tastytrade or any affiliated companies. Readers can direct questions about this blog or other trading-related subjects, to support@luckboxmagazine.com.
