Trading Gold Futures to Manage Recession Risk

Jul 10, 2018

Trading Gold Futures to Manage Recession Risk

Since the dawn of time, gold has been considered one of the most valuable resources in the world. Most great human achievements are rewarded with gold, and it has always held a place in the fabric of society. Not only is it a commercial and cultural store of value, but gold is also a traditional inflation hedge and typically rallies during a financial crisis.

During the past six months, many professional money managers have been warning of a recession and have been building bullish positions in gold. Since a possible financial crisis is now a commonly discussed theme in the financial media, we provide the following summary of current trading behavior and a historical guide to hedging with gold.

Gold Positions
The most significant asset managers in the world have been discussing recessionary behavior for most of 2018, and many appear to be hedging with gold. The latest 13F filing for money manager Bridgewater Associates, a $160 billion hedge fund, reported a $144 million position in iShares Gold Trust and a $491 million position in the Spyder Gold Trust. Ray Dalio, the firm's Founder and chief investor, has been discussing recession-like market behavior in the media for months and the press began reporting of his gold positions in February 2018.

Most recently, Scott Minerd, Guggenheim Partner's Global Chief Investment Officer, a $290 billion firm, was quoted in the media as saying "start thinking of selling things" and that the economy is on track for a recession the first quarter of 2020. Paul Tudor Jones, another legendary investor who profited from the 1987 stock market crash, has also been quoted in the media that "the next recession will be really frightening."

Historical Prices
Most market participants are aware that gold’s value has grown over time and typically, it provides crisis alpha during recessions. Taking a look at a monthly chart of nominal gold prices since 1970 below, one can see that the price action and volatility make gold an attractive futures trading product. Also, that during past financial crisis, the value of gold tends to rise. Take, for example, the 2008 financial crisis - when many investors lost more than 30% on stocks, gold was a hedge and protection for those that prepared.

Monthly Nominal Price of Gold since 1970

Current pricing
Recently, metal markets have been under pressure across the board as fears continue to intensify about trade wars and an economic slowdown. Platinum has tumbled near a two-year low and gold is trading near 6-month lows. Historically, platinum has been trading higher than gold for many years, so now may be a good time to gain exposure to both metal derivatives products. With so much uncertainty on the horizon in financial markets, gold will likely be one of the safest havens for those looking to hedge and protect capital.

With gold breaching 6-month lows and volatility picking up, futures traders are placing more bets in metals markets. Volume in gold and platinum futures at CME Group has increased, and a spread seems to have developed.

Gold vs Platinum Futures Price Per Troy Ounce 02

Gold is traded on many exchanges globally, and futures contracts provide hedgers and speculators with leverage and liquidity above and beyond the spot market. Concerning futures volume, COMEX gold futures, traded at the CME group, saw a 36.3% rise in volume from May 2017 to May 2018 and options on gold futures volume increased 153% in the past year. At Straits, we have also noticed an uptick in platinum futures trading at CME group with a 10.7% increase in contracts traded from May 2017-2018. Meanwhile, S&P futures volume at CME Group is up by just 11.6% suggesting traders are increasing their holdings in metal markets faster than they are hedging equity exposure.

Accessing Gold Futures with Straits
Straits Financial provides clients access to most derivatives exchanges that list gold futures and options on futures. Whether based in the US or Asia, our global offices offer the exchange memberships, trade financing, and support that clients need to get ahead in a highly competitive trading arena. We work with some of the most significant physical producers and hedgers in the world and are proud to call them clients. To learn more about trading gold futures with Straits, please contact our team in the US at +1 312 462 4499 or in Singapore at +65 6672 9669.

DISCLAIMER: This document is issued for information purposes only. This document is not intended, and should not under any circumstances to be construed as an offer or solicitation to buy or sell, nor financial advice or recommendation in relation to any capital market product. All the information contained herein is based on publicly available information and has been obtained from sources that Straits Financial believes to be reliable and correct at the time of publishing this document. Straits Financial will not be liable for any loss or damage of any kind (whether direct, indirect or consequential losses or other economic loss of any kind) suffered due to any omission, error, inaccuracy, incompleteness, or otherwise, any reliance on such information. Past performance or historical record of futures contracts, derivatives contracts, and commodities is not indicative of the future performance. The information in this document is subject to change without notice.  The impact on market prices due to seasonal or market cycles and current news events may already be reflected in market prices.