Buying Gold On Rallies Can Be Dangerous
London (Aug 25) The first mention of gold in the old testament of the Bible comes from Genesis, "And the gold of that land is good; bdellium and onyx stone are there. The Bible, old and new testaments, mention gold hundreds of times. In Job 28, the Apostle Peter said ones' faith is "of greater value than gold, which can withstand fire but be worn away by other means." The Bible says that gold is the most valuable possession other than knowledge, faith, life, and righteousness. The yellow metal has a long history as a store of value.
As a gold trader who has been in the market for the yellow metal for going on four decades, and a person of faith, the eleventh commandment I follow is "Thou shalt not buy gold on rallies." While there are times that the precious metal follows through on the upside, I have learned that when gold looks like the price is going to the moon, it is usually time to sell. The twelfth commandment in today's market could be, thou shall buy dips.
Since gold mining companies extract the metal from the crust of the earth, they often provide investors and traders with a leveraged position in the gold market. Mining stocks tend to outperform on the upside and underperform the price action in the yellow metal on the downside on a percentage basis. I favor the GDX and GDXJ products as they diversify risk by avoiding concentration in specific managements and mines. For those seeking action and risk in the gold market, NUGT and JNUG magnify the price action in GDX and GDXJ. The Direction Daily Junior Gold Miners Index Bull 3X Shares (JNUG) is a turbocharged vehicle that can provide significant returns during bull market periods. JNUG is one product I look to when following the twelfth commandment.
Gold volatility is lower than in other commodities
After the recent rally and wider trading ranges, monthly historical volatility in the gold futures market is under the 13% level.
As the monthly chart shows, at 12.34% on August 23, the price variance measure has climbed from a lot at 5.58% in late 2018
The silver market displays higher monthly volatility at 16.66%.
In copper monthly price variance was at 17.62%.
Crude oil monthly volatility was at 42.37%.
In natural gas futures, the metric was at just under the 64% level. Since gold is a hybrid between a raw material and a currency, the metric tends to reflect more stable price action than other commodities.
Gold volatility is higher than in currency markets
Typically, the price volatility measure in foreign exchange markets is lower than in gold, even though central banks hold the yellow metal as a currency reserve asset.
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