I used to not understand how it was possible to trade precious metals at all, except as part of a passive securities portfolio as an alternative allocation. But after studying it a bit, it turns out that there is one of the easiest trades in this market.
As we all know, price is determined by the balance of supply and demand. And in the case of precious metals, there is a huge imbalance in demand. This is because of the uneven distribution of holidays throughout the year. On holidays, people give each other gifts and jewelry flies off the shelves of jewelry stores. The jewelry business has a distinct seasonality and must protect the price of its production commodity supply by buying futures for precious metals.
The period of increased demand begins before Catholic Christmas and lasts until the end of Chinese New Year in early February. During these 2 months, precious metals rise by more than half of their total historical movement. This means that the risk/reward performance of precious metals during these 2 months is at least more than 5 times higher compared to the other 10 months!
I’m not a big fan of picking up on this trend by buying gold, even if there is still money to be made, as this precious metal has some disadvantages.
Gold is subject to a variety of side trends, such as banks increasing/decreasing their gold reserves or reacting specifically to changes in interest rates and expected inflation rates. For this reason, gold doesn’t have a particularly good risk/reward ratio or Sharpe ratio. Platinum, however, is a different matter altogether, as it has all the same jewelry properties as gold, but at the same time is less vulnerable to the side factors mentioned above, and hence less volatile.
Parameters for 1 trade: ~5% average return, maximum drawdown ~ 18%. Win rate for 56 years is 68%
I won’t provide normalized data from Excel. It is clear that everything looks just as good as it is : )
Due to the high volatility of precious metals, I recommend making this trade with no more than 33% of the account balance. Yes, the return will drop to 1.7% per trade, but since it only lasts 2 months, the productivity in the “annual return” for 12 months is still at a high level of 10.2%. Not only can you do this trade using NYMEX:PL futures, but you can also do it using ETF: PPLT if the account size does not allow you to work with a full contract.
I myself do this trade at three times the risk I recommend in this article because I analyze not only seasonality, but also the fundamental factors of the surplus/shortage of metal supply in the market. In this case, I am able to trade not only excess demand, but excess demand against a backdrop of reduced supply. This leads to very strong buying trends and allows you to make more profit against a backdrop of reduced risk. I cover this in my consultations.
Here’s another really easy trade at your disposal : )
I would appreciate if you shared your ideas or questions about this article. Please leave a comment below this article or contact me here.
Good luck with your trading and see you in the following articles!