Copper(x2)/Gold Spread: Reentry Adjustment

To the Point

We posted reentry criteria for a long position in the March-February copper(x2)/gold spread last week. First Notice Day for the gold contract will be here in a couple of weeks, so we’re going to go ahead and buyer longer-dated contracts for both metals.

May-June Copper (x2) Gold spread daily with 100-day MA

May-June Copper (x2) Gold spread daily with 100-day MA

We’re working to buy back in if the May-June copper(x2)/gold spread can make a two-day close above the declining 100-day Moving Average for the first time since the first half of June or if it can clear the late December bounce high.

The Copper/Gold Ratio: It’s Getting Interesting

The ratio between the value of one 25,000 lb. copper contract and one 100 oz. gold contract has dwindled to a nearly seven-year low of 0.45:1. In the event that the ratio matches the financial crisis low of 0.35:1, we may alter the position to buy three copper contracts for every one gold contract sold short. This will help normalize the position since one copper contract would be approximately one-third of the value of one gold contract.

Copper Gold ratio (nearest-futures) weekly

Copper Gold ratio (nearest-futures) weekly

Incidentally, the copper/gold ratio has only been as low as 0.35:1 three times in the last four decades. It turned out to be a phenomenal buying opportunity. Maybe we’ll get lucky and have another chance to get that same bargain price in 2016…

Reentry Strategy:

Cancel the hypothetical order for the March-February copper(x2)/gold spread and place a new order to buy two May copper contracts and simultaneously sell one June gold contract if the spread between the value of the sum of two 25,000 lb. copper contracts and the value of one 100 oz. gold contract makes a two-day close above the 100-day MA or a one-day close above the December 30th rally high of +$1,480. Initially, the spread should be liquidated on a two-consecutive day close $500 below the contract low that precedes the entry.

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