Gold and the ‘Cobra Effect’ | The Gold Forecast

Gold and the ‘Cobra Effect’

August 26, 2020 - 6:43pm

 by Gary Wagner

According to Wikipedia, “The cobra effect occurs when an attempted solution to a problem makes the problem worse, as a type of unintended consequence. The term is used to illustrate the causes of incorrect stimulation in economy and politics.”

The term comes from a story that references an attempt by the British government in India to reduce the number of deadly cobras. They offered a bounty for every dead cobra, which initially reduced the number of venomous snakes in Delhi. However, individuals began to breed cobras for income, and when the government became aware of this canceled the rewards program. This caused those breeding cobras to release the snakes in the wild which had the net result of increasing the population of the venomous snake.

Many analysts, including myself, have been under the belief that the monetary policy of the Federal Reserve and the majority of core central banks globally to attempt to stabilize their economies in light of the global pandemic could well have unintended and detrimental consequences down the road.

Larry McDonald, a New York Times best-selling author and CNBC contributor used this term in a blog for ‘The Bear Traps Report’ where he explained that current monetary policies by global central banks and government stimulus will lead to unintended negative consequences. In essence his point is that the solution could be worse than the problem.

In his blog he wrote that, “We believe we are at the early stage of the biggest cobra effect in the history of economics. As the massive monetary and massive fiscal stimuli (over $15T globally) conjoin to save the economy from a deflationary depression, they will cause instead a hyperinflationary economic collapse.”

Although Larry McDonald wrote this blog at the beginning of the year, it is nonetheless relevant today. With the upcoming virtual Economic Summit and Chairman Powell’s keynote speech, many traders will focus intently to see if Chairman Powell will suggest a more accommodative monetary stance than is currently in place. There is also the belief the Chairman Powell will rebalance the Fed’s target rate for rising inflation.

According to MarketWatch, “Powell is expected to advocate for a so-called asymmetric inflation target, one that allows policy makers to let inflation rise above their traditional annual target of 2%, which could be seen as bullish for gold and other precious metals.”

Concurrently tensions between the United States and China have risen to a new level. It was reported that China had launched missiles which included an ‘aircraft-carrier killer’ into the South China Sea during their recent wargames as a warning to the United States.

Collectively this revitalized the bullish market sentiment in gold and silver which had been absent as both precious metals have been trading under pressure for the last week. As of 4:30 PM EDT, gold futures basis the most active December 2020 contract is currently up $39.90 (+1.97%) and fixed at $1961. Silver futures gained approximately $1.26 in trading today (+4.80%) and are fixed at $27.535.

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer

This report is now free and publicly available to everyone

Gold Forecast: Proper Action

This morning we sent out a Trade Alert to;
Buy December gold at the market (current = $1956 - 57) Stop @ $1898
Buy December Silver at the market (current = 27.39) stop @ 25.95
Buy Forex gold at the market (current = $1948.55) Stop @ 1899

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Maintain long December gold @ $1956.50. Maintain stop @ $1898.
Maintain long December silver @ $27.39. Maintain stop @ $22.98. 
Maintain long forex gold @ $1948.55. Maintain stop @ $1899.
Maintain GLD @ $183.57. Maintain stop @ $178.66.
Maintain SLV @ $25.10. Maintain stop @ $22.98. 

Trades we Closed on August 19th

Long September silver at $26.68. Our stop was hit @ $26.87 for a profit of $1000 per contract.

Long December Gold at $1955.50. Our stop was hit @ $1979 for a profit of $2350 per contract

Long Forex Gold at $1947. Our stop was hit @ $1967,52 for a profit of $20.52 per Ounce

Trades we Closed on August 11th

Long September silver at $24.40. Our stop was hit @ $25.99 for a profit of $7950 per contract
Bought  GLD @ $166.74. Our stop was hit @ $$183.00 for a profit of $16.87 per share.
Bought SLV @ $18.00  Our stop was hit @ $23.80 for a profit of $5.80 per share.

Trades We Closed on August 7th

NUGT – we sold all shares and took profits of $33.19 per share
Long December gold at $1997, we covered the trade @ $2035 for a profit of $3800 per contract
Long Forex gold at $1977, we covered the trade @ $2017 for a profit of $40.00 per ounce

Closed trades:

GLD: On April 12th our stop was hit at $162. We went long at 162.82. Trade resulted in 0.82 loss per share.

Futures: Gold (GC J21) in at 1722.80. Out at at $1728 for a profit of $520.00- per Comex contract.
Forex: XAUUSD in at 1724.40. Out at at $1729 for a profit of $4.60- per ounce.
ETF's: GLD in at 161.55. Out at at $161.90 for a profit of $0.35- per share

SLV in at $24.24. Stop hit at $23.50, for a loss of $1.05 per share
May 2021 (SI K21) in at $26.26. Stop hit at $25.3 for a loss of $0.96 ounce
Forex silver in at $26.17. Stop hit at $25,30 or a loss of $0.87 per ounce

On February 18 we entered a long April Platinum trade. In at $1282. Our stop was hit today (02/26/21) @ at $1217.00
SILVER FUTURES MARCH: Entry at $27.36, and then closed the trade later @ $27.45.
XAGUSD: Entry at $27.26,, our stop was hit at $27.39

We closed our positions in SLV:
First leg SLV: @ 22.95 .out at @ $24.99
Second leg SLV @ 24.60. out at @ $24.99

On Thursday February 4 stops were hit on our long GLD ETF. We entered at 172.14. Our stop was hit at $168.29 (the open on Thursday) for a $3.85 loss per share.

GOLD FUTURES APRIL: Entry at 1845 - 1859 . Stop hit at 1813 - average loss $3900 per contract
XAUSUD: Entry at 1845 - 1857 . Stop hit at 1813 - average loss of $38 per oz
SILVER FUTURES MARCH: Entry at 25.42 - 25.46 . Stop hit at 24.11 - average loss $6650 per contract
XAGUSD: Entry at 25.33 - 25.40 - Stop hit at 24.11 - average loss $1.3 per oz
long February gold @ $1890.00 and stop hit @ $1902.20, for a profit of $1202.00 per contract
long Forex gold @ $1886.00 and stop hit @ $1898 for a profit of $12.00 per OZ
long March silver @ $26.31 and stop hit @ $26.41 for a profit of $500.00 per contract
long GLD @ $177.26 and stop hit @ $178.00 for a profit of $0.71 per share
long SLV @ $24.67 and stop hit @ 25.00 for a profit of $0.33 per share
long February Gold Futures at $1860-$1866 and stop hit at at $1869. Average profit $600 per contract
long XAUUSD at $1856-$1862 and stop hit at $1866. Average profit $6
long March Silver Futures at $25.16 - $25.25 and stop hit at $25.30. Average profit $450 per contract
long GLD @ $174.12 and stop hit at $175.78 for a profit of $1.66 per share
long GLD @ $174.12 and stop hit at $175.78 for a profit of $1.66 per share
long February Gold Futures at $1830 -$1843 and out at $1850 for a profit of $700 to $2000.00 per contract
long XAUUSD at $1841 and out at $1850 for a profit of $90.00 per mini 10 oz contract
long March Silver Futures at $24.29 and out @ $24.40 for a profit of $550.00 per comex contract
long GLD @ 1$71.50 and out @ $173.00 for a profit of $1.50 per share
long SLV @ $22.30 and out @ $22.50 for a profit of $0.20 per share
Long December gold at $1899. Stop hit at $1918, for a $1900 profit
Long forex gold at $1896.00. Stop hit at $1912, for a $1600 profit
Long December silver at $24.21. Stop hit at $25.07 for a $4300 profit
Long GLD at $180.46 and stop hit at $176.42 for a loss of $4.04 per share
Long SLV at $23.23 and stop at $22.78 for a loss of $0.40 per share
Long December Gold Futures at $1926 and stop hit at $1907.30 for a loss of $18.70 per ounce
Long Forex Gold at $1922 and stop hit at $1903 for a loss of $19.00 per ounce
Long December Silver Futures at $25.13 and stop hit at $24.73 for a loss of $0.40 per ounce
Long December gold at $1890, out at $1909.30 for a profit of $1,930.00
Long December silver at $23.95, out at $24.50 for a profit of $2,750.00
Long Forex gold at $1883.68, out $1907 for a profit of $23.32 per ounce
Long GLD ETF at $178.03, out at $179.80 for a profit of $1.77 per share
Long SLV ETF at $22.66, out at $22.03 for a loss of $0.63 per share

Gold Market Forecast

With the most important economic event of the summer beginning tomorrow all eyes will focus upon the virtual Economic Summit, and specifically to Fed Chairman Jerome Powell’s keynote speech which will be delivered at 9 AM Eastern standard Time tomorrow morning. That being said the rebalancing of the target inflation rate is expected to be amongst the major topics he covers during his speech. Factoring this new easing of monetary policy by the Federal Reserve is personally responsible for today’s $40 gain in gold, as over a 4% gain and silver.

As far as the launching of missiles by China, this event could be a “one and done”, especially since the two countries have been trying to resolve the current trade dispute. However collectively these events could take both gold and silver substantially higher. On tomorrow’s video report we will cover events that occurred at the economic summit as well as talk about our exit strategy for our current trade.

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