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The Daily Fix: Gold traders playbook

Chris Weston
Head of Research
Feb 4, 2020
For today’s ‘Daily Fix’ I have looked at the gold market in far greater depth. With such elevated client interest in the yellow metal, I have started a weekly video looking at trading gold from a more holistic perspective.

Here, we look at market measures of the sentiment in the macro backdrop, which has improved somewhat but remains fluid.

I look at correlation analysis, looking at the 20-day rolling correlation and 12-month regression analysis to build a framework to understand what is really driving gold. I have focused on the technical set-up (see below), risk reversals (options skew), positioning and other key variables we should consider.

Independent variable correlation chart

For those in search of the true drivers of gold it can be incredibly difficult to pinpoint what they are, and whether this is USDJPY, USDCNH, the US bond markets, or higher volatility. Identifying the prominent driver can actually be advantageous and help us with our edge. Of course, for those scalping or trading purely off-price action then knowing that the bond market is the main driver perhaps doesn’t appeal as much. But having an understanding of the expected moves and the implied volatility can offer increased confidence in the algorithm.

XAUUSD daily chart

As we see the correlation matrix I look at various inputs and assess the rolling correlation and 12-month R^2 correlation coefficient – with regards to the former, any reading below -0.75 or above +0.75 interests me and is significant.

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