Copper/Gold Spread: There May Be More Downside Ahead

Bag the Profits

IMC blog entered a long position in the July-June copper(x2)/gold spread from the equivalent of -$21,885 (premium gold) on September 29th.

The spread exploded higher at the end of last year.  A double top was established at similar highs in December and February.  At this point, the value of a pair of copper contracts had a 15% premium over the value of one gold contract.

Based on history, it seemed that this was merely a consolidation phase before the next leg higher.   After all, previous instances where two copper contracts traded at a discount to the value of one gold contract were followed by major trend reversals that ran the value of two copper contracts to a premium of 66% or more to the value of one gold contract.  This meant that the expectation of more upside was significant.

Alas, the market didn’t take out feelings, wishes, and hopes into account.  The copper(x2)/gold spread has been steadily eroding and taking back some of our open profits.  It’s now approaching the 200-day Moving Average as well.  A close below the 200-day MA for the first time since October could accelerate the decline.  Therefore, it makes sense to cash in our chips and wait for another hand to be dealt before we place anymore bets on this spread.  However, we won’t complain: the trade will net us a profit of nearly +$23,000 per spread.

July-June Copper Gold spread daily

July-June Copper Gold spread daily

For the December copper(x2)/gold spread, a Fibonacci .618 retracement of the run up would set technical support at -$12,428.  If the spread gets back down to this level, we will be watching to see if some sort of setup materializes to allow us back on board.

Trade Strategy:

Sell the two July copper contracts and simultaneously buy back the one short June gold contract at the market-on-close on Monday, June 5th. 

 

 

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