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A Trading Opportunity for Gold and Crude?

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Pairs trades often offer compelling risk-reward.

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Last year in the 'Ville, we noted the chasm between the price action in gold and crude and offered that a pairs trade -- buying one and selling the other on a dollar neutral basis -- could prove to be a snazzy situation... and it did.

I "get" why gold is glittering; when the US dollar is considered best in breed despite our own burgeoning budget deficits, the notion of an alternative currency gains steam. That along with stockpiling in China and other dynamics make a great case for the yellow metal, which have been loud given the golden power.

As I was readying for the Friday night lights, the preceding segment highlighted the arrival of gold vending machines in Abu Dhabi. I've seen similar movies before and they rarely end well for the underlying asset. And then there's the matter of The Mr. T Gold Indicator; laugh all you want but be ready for some pity -- the performance speaks for itself and the A-Team movie is set for release in June.

Given the migration across the tricky trifecta -- an unfortunate evolution from societal acrimony to social unrest to geopolitical conflict -- the sad reality is that we could wake up one morning to headline risk that spikes both gold and crude, particularly if the tension stems from the Middle East and impacts the Strait of Hormuz.

Which brings us back to the point of this short but sweet column; looking at the chart below, one could argue that a "long crude-short gold" pairs trade makes sense given the chasm that's been created over the last few weeks. I'm in the process of legging into this trade but please know it's not advice. As I don't know your risk profile and time horizon, I couldn't possibly suggest that this particular bet fits for you.


Click to enlarge

Just sharing the process, as we're apt to do in the 'Ville. As always, I hope this finds you well.

R.P.

Also, don't miss Todd's Random Thoughts video segment on this topic below.



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Position in GLD, USO
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