The real shocker today in the Fed?s announcement is that it may increase monetary easing from here. As if we haven?t had enough already, with the US and Japan throwing in a combined $170 billion a month worth of monetary stimulus!
More easing means that the America?s central bank thinks the global economy is even weaker than you and I realize. Yikes! Man the lifeboats, pass out the parachutes, and tighten your seatbelts! This is bad for commodities and even worse for precious metals, especially gold.
The barbarous relic has managed an impressive $155 rally off its $1,325 bottom made two weeks ago. This is one of the sharpest and fastest moves up in the yellow metal in history. It has been largely achieved through massive buying of physical coins in India and the US, as well as short covering in the futures markets and the ETF (GLD). The disappearance of margin calls has also been a major help.
The heavy hand of the China slowdown is still with us. So I am more than happy to buy the SPDR Gold Trust Shares June, 2013 $150-$155 in-the-money bear put spread. The big attraction here is that I have a generous $97 safety cushion over the next six weeks before I lose money on this trade.
You can thank the sky high implied volatilities on the (GLD) puts for getting such a great deal on this spread. Just for the sake of comparison, the implied on the (GLD) $150 puts you just sold short is 18.2%, some 30% higher than the 14% front month implied on the Volatility Index on the S&P 500. If you don?t understand why this is important, please buy the book, Options for the Beginner and Beyond, at Amazon by clicking the title or the book cover below.
Time To Grab a Second Handful
https://www.madhedgefundtrader.com/wp-content/uploads/2013/04/Gold-Nuggets.jpg414617Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2013-05-02 10:12:202013-05-02 10:12:20Selling Gold Again
Thanks to last week?s Armageddon type crash in gold prices, implied volatilities on options in the SPDR Gold Trust Shares (GLD) have rocketed to five-year highs. This is in sharp contrast to equity index option implieds, which are just a few percent above six year lows. Therefore, the deep in the money option strategy in the (GLD) is now vastly superior to alternatives found in the S&P 500 (SPY) and the Russell 2000 (IWM).
This means that it is possible to strap on a call spread in (GLD) that is miles in the money with extremely low risk, and still earn a decent four-week return. That is the case with the SPDR Gold Trust Shares May, 2013 $125-$130 call spread. The (GLD) has to drop a further $8.11, or $81 in underlying gold terms over the next 19 trading days for you to lose money.
Coming on top of the previous $200 collapse in gold, a mathematician would describe this as a six standard deviation event. That is another way of saying that moves like this occur only once every 2,000 years. This is a probability that I am more than happy to bet against. Also, redemption in ETF (GLD) hit $2 billion last week, the largest on record, and has probably peaked.
I spent the weekend talking to my consulting clients at the central banks of China and Singapore. Although they are not allowed to disclose their exact plans in advance, using the standard code words they made it clear to me that they would be major buyers of the barbarous relic at $1,250 and below.
You can bet that at least a dozen other emerging market central banks will be joining them there. $1,250 in gold was a major upside breakout level on the way up that should provide solid support on the way down. That is why I am going with such a hefty 20% weighting. I am also taking a big bite of (GLD) because there are so few attractive risk/reward propositions in other asset classes at these lofty levels.
You have to go back nearly three and a half years to find new buyers with a cost basis lower than $1,250. That means we have probably flushed out all of the weak, short and medium term owners of gold with the recent melt down, and there is probably not much selling left to be seen.
There is also a ton of technical support that kicks in at the $1,250-$1,300 range. The bull market in gold ignited in 2001 at $255/ounce. A 38.2% Fibonacci retracement from the $1,920 peak takes us back to $1,286. Focusing on a shorter time frame, a 50% drop from the most recent run that started at $750 in 2008 hits at $1,302. When you get this much technical congestion around the same price levels, they tend to hold.
This could be the trade that keeps on giving. If we really are putting in a long-term bottom for the yellow metal over $1,250, it could take several months for the cement to dry. That means we could strap on a new position every month, possibly until the end of the year. It will be like having a rich uncle that writes you a check every four weeks, much like shorting the Japanese yen was last year.
Gold is not dead, it is just resting. All of the long-term arguments in favor of gold still hold true. Those include, the desire of emerging market central banks to own a higher percentage of their reserves in gold, rising emerging market standards of living, the return of double digit inflation during a global economic boom in the 2020?s, and the preference of global central banks to print money until then. It also makes a nice Christmas present. So at some point, the barbarous relic should take another run at its old inflation adjusted high of $2,300 an ounce.
The Summer Sales Started Early This Year
https://www.madhedgefundtrader.com/wp-content/uploads/2013/04/Gold-Nuggets.jpg414617Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2013-04-23 01:32:582013-04-23 01:32:58Probing for a Bottom in Gold
Sometimes, the best trades are the ones you don?t do. I actually wrote up a Trade Alert to buy gold on Thursday, figuring that it would bounce the first time it hit my downside target of $1,500.
But then I scanned the entire hard asset landscape, and saw that everything was selling off huge; silver (SLV), platinum (PPLT), palladium (PALL), oil (USO), copper (CU), and iron ore. I took a long nap. When I woke up, I decided that there was something much bigger going on here, and the urge to buy the barbarous relic suddenly vaporized. I sent the Trade Alert to my recycle bin.
The selloff that ensued on Friday was of Biblical proportions, with the yellow metal taking an unbelievable $86, 5.5% swan dive. They say this is the commodity that takes the stairs up and the elevator down, and that was no more true than today.
I have been pounding the table trying to get readers out of gold since early December. It is clear what is going on here. The world is dumping hard assets of every description and pouring the money into paper ones. Commodities you can drop on your foot are getting dumped, and generous premiums are being paid for anything that can be created with a printing press. It?s as simple as that.
This is why you are having both bonds and stocks going up at the same time, a rare event in capital markets. In effect, everything is now a bond, both the wide array of fixed income securities that are getting chased, along with dividend yielding stocks. This is why a wide swath of technology stocks, like Apple (AAPL), are not participating in the game.
I called around to some of the leading technical analysts to see how much pain gold was in for. The tidings were grim. The 200-week moving average at $1,433 looks like a chip shot. If that doesn?t hold, then $1,300 is in the cards. My favorite target is the old October, 2009 breakout level where the Reserve Bank of India came in out of the blue and bought 200 tonnes of the sparkly stuff, punching it through to a new all time high. The previous resistance should now become support. This is the number my jeweler favors.
To make matters particularly fiendish for traders, we may see a breakdown well into the $1,400?s that sucks in tons of capitulation sellers, then a big bounce before a downtrend resumes. It is a scenario that will be enough to test even the most devoted of gold bugs.
At risk is nothing less than the end of a bull market that is entering its 12th year. The shares of gold miners suggest that the demise of gold is already a foregone conclusion. The index for this group (GDM) has breached major support once again and is looking for a new four year low. Since this index usually correlates very highly with the barbarous relic, the writing is on the wall.
There are a host of reasons why the yellow metal has suddenly become so unloved. The largest holder of the gold ETF (GLD), John Paulson, is getting big redemptions in his hedge fund, forcing him to sell. This is why the selling is so apparent in the paper gold markets, like the ETF?s, but not in the physical bars and coins.
India has suddenly seen its currency, the rupee, drop against the greenback. That reduces the buying power of the world?s largest gold importer. With years of pernicious deflation ahead of us, who needs a traditional inflation hedge like the yellow metal anyway?
The hyper quantitative easing announced by the BOJ last week has created an entire new class of gold liquidators. Gold has actually risen dramatically in yen (FXY) terms over the past five months, so retail jewelers across Japan have had to expand business hours to accommodate long lines of eager sellers. The overflow is hitting the international markets big time.
Here is the final nail in the coffin for gold. Gold has had a dozen reasons to rally over the past six months. Those include the European monetary crisis, the Italian elections, the Spanish elections, the Cyprus bank account seizures, sequestration, the fiscal cliff, Ben Bernanke?s QE3, the Japanese ultra QE, rising capital gains taxes, and even the reelection of president Obama. It has utterly failed to do so.
Any trader long in the tooth, such as myself, will tell you that if a market can?t rally on repeated fabulous news, then you sell the daylights out of it. That is what we got with gold, in spades, on Friday.
https://www.madhedgefundtrader.com/wp-content/uploads/2013/04/Market-Down.jpg415564Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2013-04-15 09:24:352013-04-15 09:24:35Gold: Next Stop $1,250!
The 'Oracle of Omaha' expounded at length today on why he despises the barbarous relic. The sage doesn't really care about the yellow metal, whatever the price. He sees it primarily as a bet on fear.
If investors are more afraid in a year than they are today, then you make money. If they aren't, then you lose money. If you took all the gold in the world, it would form a cube 67 feet on a side, worth $7 trillion. For that same amount of money, you could own other assets with far greater productive earning power, including:
*All the farmland in the US, about 1 billion acres, which is worth $2.5 trillion.
*Seven Apple?s (AAPL), the second largest capitalized company in the world.
*You would still have $2 trillion left over in walking around money.
Instead of producing any income or dividends, gold just sits there and shines, making you feel like King Midas.
I don't know. With the stock market at an all time high, and oil trading at $96/barrel, a bet on fear looks pretty good to me right now. I'm still sticking with my long term forecast of the old inflation adjusted high of $2,300/ounce. But we may have to visit $1,500 on the way there first.
Maybe Feeling Like King Midas is Not So Bad
https://www.madhedgefundtrader.com/wp-content/uploads/2013/03/Gold-Coin.jpg235225Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2013-03-27 09:34:332013-03-27 09:34:33Why Warren Buffet Hates Gold
It certainly has been a year of gnashing teeth and tearing hair for inveterate gold bugs (GLD). They got everything they wanted on the fundamental side. Runaway printing presses from the Federal Reserve, profligate spending from the US government, and a series of unending crises threatening our oil supplies in the Middle East.
Yet, the barbarous relic has barely budged. It is down 4% year on year, and has been in a full-scale bear market for the past 18 months, stuck at $250 off its peak price. This flaccid performance is particularly egregious in the face of? a torrid stock market, which has seen the S&P 500 soar 13% from its November bottom. What gives? Is there no value in a financial panic anymore?
To paraphrase Winston Churchill, the answer is ?a riddle, wrapped in mystery, inside an enigma,? which is a fancy way of saying there are more reasons than one can count.
No growth in the monetary base is the first answer that I give guests at my frequent global strategy luncheons. Over the last four years, the Fed balance sheet has ballooned from $800 billion to $3.6 trillion, and could be on its way to $5 trillion, thanks to QE1, 2, 3, 4, and infinity.
But the actual money in circulation in the broader economy, as measured by the Federal Reserve Bank of St. Louis, has flat lined for the past 18 months. No real monetary growth means no rising gold prices. Where did all that money go? On to the balance sheets of the big banks that refuse to lend, where it has sat, frozen in stone.
Gold in the past has been resorted to as a traditional inflation hedge. But look at the entire globe, and you can only find double digit price rises in sanction ridden Iran. They have been notable sellers of gold as they attempt to sell oil pay and for imports outside a US dollar based financial system. Look anywhere else, and deflation is the scourge of the day, from Japan, to Europe, to the US. Gold doesn?t fit in this picture anywhere.
Huge buying from China was a major factor in the golden age of the 2000?s, which enjoys a strong cultural affinity for all hard assets, especially gold and silver. A slower growing Middle Kingdom brings fewer buyers of the yellow metal. Sure, the post election (theirs, not ours) economy is recovering, but only to an 8% GDP growth rate, not the red hot 13% rate of past years. I can almost hear the air going out of gold.
The global bid we have seen for almost all risk assets has not exactly drawn buyers to the yellow stuff. Who needs an insurance policy when you are going to live forever. Gold used to be a ?RISK ON? asset, but underwent a gender change operation last fall. Now it goes to sleep whenever traders stampede into stocks.
Finally, gold has stopped rising because of the advanced age of the bull market. The yellow metal has been appreciating off its $240 bottom for 15 years now. It may have simply run out of steam. The last bull market, which launched when the US went off the gold standard in 1972, lasted only eight years. I remember waiting in line at a Johannesburg gold store to sell krugerands when it peaked.
It is an old trader?s nostrum that the cure for high prices is high prices. At least holders of bullion and coins have the consolation that they don?t own gold stocks (GDX), which have performed far worse.
I don?t believe that gold has entered a permanent bear market. Emerging market central banks still have to triple their holdings to catch up with the asset allocations of their western compatriots. That adds up to a lot of gold.
Individuals in emerging markets are still boosting gold holdings, although at a slower marginal rate than in the past. But for the time being, they seem content to sit on low bids around $1,500 and let the market come to them. I do expect a resurgence of gold?s best friend, inflation. But that won?t happen until we are well into the 2020?s, when a stiff demographic tailwind fans the flames.
Until then, the yellow metal could well stay directionless. That is a day trader?s or margin trader?s worst nightmare.
Flat Monetary Growth Means Flat Gold Prices
Crummy Long
Great Long
Call Me When You Wake Up
https://www.madhedgefundtrader.com/wp-content/uploads/2013/02/Golden-Girl-2.jpg219431Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2013-02-05 09:30:472013-02-05 09:30:47Why Gold is Dead
Look at the charts for the barbarous relic below and you can only come to one possible conclusion. If the Federal Reserve disappoints on Thursday, just a little bit, even by a smidgeon, and does not deliver QE3 and gold sells off big, you should jump in and by the stuff like crazy.
All of the charts for gold and the derivative plays are showing major breakouts to the upside. This is true for spot gold and the ETF (GLD), which broke a major downtrend line last week. It is the case for the gold miners ETF (GDX). It is also the reality for silver, the silver ETF (SLV), and the silver miners (SIL).
The entire precious metals space has been floated since the prospect of further quantitative easing from the world?s central banks started in earnest on May 15. Since then, it has been prudent and profitable to buy every dip.
European Central Bank president Mario Draghi did the heavy lifting in mid-July by promising to ?Do whatever it takes to rescue the Euro? (read: huge quantitative easing). He then put his money where his mouth was last week by announcing an unlimited bond-buying program.
Assorted dovish Federal Reserve governors have done their bit by talking up the prospect of further monetary easing. China threw in its ten cents by announcing a $150 billion reflationary budget on Friday. Even the Bank of Japan has been heard murmuring about additional money printing. It all has the smell of an international coordinated effort to reflate the global economy.
Where exactly do you get back in? The sweet spot in the (GLD) will be the 200 day moving average at $159.66, which fell at the end of August. That is down $7.94 in (GLD), or $79.40 in the spot market from here.
Would you Consider a Long-Term Relationship?
https://www.madhedgefundtrader.com/wp-content/uploads/2012/09/bond.jpg300400DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-09-10 23:46:422012-09-10 23:46:42Buy the Big Dip in Gold.
Gold has clearly evolved into a call option on global quantitative easing. Don?t think of it just as the stuff your dentist puts in your teeth or the thing your girlfriends gets you to wrap around her finger anymore. I don?t think that the Federal Reserve will implement QE3 at its September 16-17 meeting, or even next year. This shocking realization will be bad for gold prices.
However, Europe is a completely different kettle of fish. Having just spent two months there, I can tell you with great certainty that the economic conditions are far more extreme than any economic data releases are indicating so far.
So the ECB has to launch its own QE through a second tranche of the LTRO or some other vehicle of at least ?500 billion ? ?1 trillion. While most of this money will be used to buy high yield European sovereign bonds, some will spill over into the gold market, and that will be good for prices.
I can?t tell you how bad things are in Italy. I just visited the main middle class shopping district in Milan. The sales were offering discounts of 70%, 80%, and 90%. They were literally throwing inventory out the door. I?m talking pants for $5 and overcoats for $25. I ended up buying four suitcases, those at 50% off, and filing them up with clothes for everyone I know. I got clothes for the kids, cloths for distant relatives, even clothes for people I don?t like. And it barely made a dent on my credit card.
The attraction of the September 2012 $148-$151 call structure is the following. The $151 strike is just below rock solid support for gold that has held for several months. The September expiration allows us to take out 90% of the profit before the Fed gives us the bad news on no QE3 next month. Gold could well keep moving sideways until then, which is why I am not rushing out and buying out-of-the-money calls. This all happens going into the traditional seasonal strength of the Indian wedding season, Christmas in the West, and the Chinese Lunar New Year.
By leveraging up an out of the money call spread in a limited risk position, I get an outsized return. This is a bet that gold will move up, sideways, or down no more than 3% over the next four weeks. If this happens, the call spread will rise in value from $2.42 to $3.00, a gain of 24%. This is why I went for a heavy 10% weighting.
Better Bring an Extra Suitcase
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-08-15 23:03:242012-08-15 23:03:24Time to Pick Up Some Gold
For the past two years, I have maintained a GDP growth forecast for the US of 2% a year. I have not stuck with this figure because I am stubborn, obstinate, or too lazy to update my analysis of the future of the world?s largest economy. I have kept this number nailed to the mast because it has been right.
I have watched other far more august institution with vastly more resources than I gradually ratchet down their own numbers towards mine, such as Goldman Sachs (GS) and the Federal Reserve. So I feel vindicated. But now that they are coming in line with my own subpar, lukewarm, flaccid 2% prediction, I am downsizing my forecast further to 1.5%. This is not good for risk assets anywhere, and may be what the markets are shouting at us with their recent hair raising behavior.
I am not toning down my future expectation because I am a party pooper or curmudgeon, although I have frequently been called this in the past. After all, hedge fund managers are the asset jockeys that everyone loves to hate. My more sobering outlook comes from a variety of fundamental changes that are now working their way through the system.
First, let me start with the positives, because it is such a short list. The work week is now the longest since 1945, no doubt being helped by onshoring triggered by rising Chinese wages. The car industry is in amazingly good shape, although the vehicles they are selling in larger numbers are much smaller than the behemoths of the past, with thinner profit margins. Credit is expanding, if you can get it. The housing market has finally stopped crashing and might actually add 0.3% to GDP this year.
Now for the deficit side of the balance sheet. The $4 trillion in wealth destruction created by the housing crash is still gone, and will remain missing in action for at least another decade. The home ATM is long gone. Income growth at 1.7% is still the slowest since the Great Depression, and is far below the historic 3% annual rate. Not only do people work longer hours, they get paid much less money for it.
Home mortgages rationed to only the highest credit borrowers has cut housing turnover off at the knees. This means fewer buyers of appliances and other things you need to remodel a new home purchase. It also kills job mobility, trapping worker where the jobs aren?t. Notice that vast suburbs remain abandoned in Las Vegas and Phoenix, while thousands live in impromptu RV camps in booming North Dakota.
If you want to understand the implications of the fiscal cliff at year end, watch the cult film, Thelma and Louise, one more time.? That?s where the heroines deliberately go plunging into the Grand Canyon in a classic Ford Thunderbird. The noise surrounding the presidential election is going settle ones nerves about as much as scratching one?s fingernails on a chalkboard.
The global situation looks far worse than our own. This is not good, as foreign sources account for 50% of S&P 500 earnings, and as much as 80% for many individual companies. To understand how wide the contagion has spread, look at the numbers put out on a recent JP Morgan forecast.
The European impact on our economy is about as welcome as the 1918 Spanish flu, when million died. (JPM) cut their expectation of growth there from -0.1% to -0.5%. Italy is shrinking at a -2.2% rate. Their prediction for growth in Latin America has been chopped -0.5% to 3.3%, while China has been pared by -0.5% to 7.7%. Japan is enjoying a rare 0.5% pop to 2.5%, but that is expected to fade once a massive round of tsunami reconstruction spending is done. Overall, global growth is decelerating from 4.5% to only 2%, with 82% of that growth coming from emerging markets. The last time a global slowdown was this synchronized was in 2008. Remember what stock markets did then?
All of this may be why hedge funds are fleeing this market in droves as fast as they can, including myself. Many of the small and medium sized funds I know are now 100% cash, and the big ones are only staying because they are trapped by their size. There are few good longs out there for the moment and fewer shorts. Prices are gyrating on a daily basis, triggered by overseas headlines where every else seems to have an unfair head start.
Suddenly the yacht at Cannes, the beach at the Hamptons, and the golf course at Pebble Beach seem much more alluring. Yes, clients dislike it when their managers are flat because they are getting paid for doing nothing. But they hate losing money even more.
Did You Say 1.5% US GDP Growth?
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-06-24 23:03:552012-06-24 23:03:55Why I Am Chopping My US GDP Forecast to 1.5%
One of my best calls of the year was to plead with readers to avoid gold like the plague, periodically dipping in on the short side only. The barbarous relic has been in a bear market since it peaked at $1,922 an ounce at the end of August last year. Gold shares have fared much worse, with lead stock Barrack Gold (ABX) dropping 36% since then and the gold miners ETF (GDX) suffering a heart rending 43% haircut.
However, the recent price action suggests that hard times may be over for this hardest of all assets. Despite repeated attempts, the yellow metal has failed to break down below the $1,500 support level that I have been broadcasting as the line in the sand.
It has rallied $100 since the last try a few weeks ago. (GDX) has performed even better, popping 23%. For the last month, the entire precious metals space has traded like it was a call option on global quantitative easing (see yesterday?s piece). Dramatically worsening economic data is increasing the likelihood of further monetary easing generating a nice bid for gold.
Now the calendar is about to ride to the rescue as a close ally. It turns out that in recent years, there has been a major seasonal element to the gold trade, almost as good as the November/May cycle that drives the stock market. Gold typically sees a summer low. Then traders start anticipating the September Indian gold season when the purchase of gifts and dowries become a big price driver. That explains why India, with a population of 1.2 billion, is the world?s largest gold buyer.
Next comes the Christmas jewelry buying season in western countries. That is followed by the gift giving and debt repayments during the Chinese Lunar New Year, during which we see multi month peaks in the yellow metal. That is exactly what we saw this year. The only weakness in this argument is that a slowing Chinese economy could generate less demand this time.
These are heady inflows into such a small space. All of the gold mined in human history, from King Solomon's mines, to the bars still in Swiss bank vaults bearing Nazi eagles (I've seen them) would only fill 2.5 Olympic sized swimming pools. That amounts to 5.3 billion ounces, about $8.6 trillion at today's prices. For you trivia freaks out there, that is a cube with 66 feet on an edge. China is the largest producer (13.1%), followed by Australia (10%) and the US (8.8%).
Peak gold may well be upon us. Production has been falling for a decade, although it reached 94 million ounces last year worth $153 billion at today?s prices. That would rank gold 5th as a Fortune 500 company, just ahead of General Electric (GE). It is also only .38% of global public debt markets worth $40 trillion.
That is not much when you have the entire world bidding for it, governments and individuals alike. Talk about getting a camel through the eye of a needle! We may well see the bull market end only when those two asset classes, government bonds and gold, see outstanding values reach parity, implying a major increase in gold prices from here. That is well above my own personal target of the old inflation adjusted high of $2,300. No wonder buying is spilling out into the other precious metals, silver (SLV), platinum (PPLT), and palladium (PALL).
The thumbnail technical view here is that we have broken the 50 day moving average at $1,610, so we may have a clear shot at the 200 day average at $1,680. There may be an easy $50 here for the nimble, and more if we break that. The current ?RISK ON? mood certainly helps this trade.
When playing in the gold space, I always prefer to buy the futures or the (GLD), the world?s second largest ETF by market cap, either outright or through a longer dated call spread. The dealing costs are far too high for trading physical bars and coins, and can run as high as 30% for a round trip. Having spent 40 years following mining companies, I can tell you that there are just way too many things that can go wrong with them for me to risk capital. They can get nationalized, suffer from incompetent management, hedge out their gold risk, get hit with strikes or floods, or get tarred by poor equity market sentiment. They also must endure the highest inflation rate of any industry, around 15%-20% a year, which hurts the bottom line.
Better just to stick with the sparkly stuff.
It?s Time to Start Dabbling in Gold Again
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-06-18 23:02:302012-06-18 23:02:30Gold is Making a Comeback
The abject failure of the equity indexes to breach even the first line of upside resistance does not bode well for the ?RISK ON? trade at all. Only a week ago I predicted that the markets would be challenged to top 1,340 in the (SPX) and $78 for the Russell 2000 (IWM). In fact, we made it up only to 1,335 and $77.90 respectively.
To see the melt down resume ahead of the month end window dressing is particularly concerning. That?s the one day a month that investors really try to pretend that everything is alright. People just can?t wait to sell.
Blame Europe again, which saw Spanish bond yields reach a 6.6% yield on the ten year and the Italian bond market roll over like the ?Roma? (a WWII battleship sunk by the Germans while trying to surrender to the Allies). Facebook didn?t help, knocking another $8 billion off its market capitalization, further souring sentiment.
Urging traders to head for the exits was confirming weakness across the entire asset class universe. The Euro is in free fall. Copper took a dive. Oil is plumbing new 2012 lows. Treasury bond prices rocketed, taking ten year yields to new all-time lows at 1.65%. It all adds up to a big giant ?SELL!?
It is just a matter of days before we revisit the (SPX) 200 day moving average at 1,280. Thereafter, the big Fibonacci level at 1,250 kicks in. It is also exactly one half the move off of the October 2011 low, and unchanged on the year for 2012.
I am not looking for a major crash here a la 2011. There is just not enough leverage and hot long positions in the system to take us down to 1,060. It will be a case of thrice burned, four times warned. And remember, last year?s 1,060 is this year?s 1,100, thanks to the earnings growth we have seen since then. With 56% of all S&P 500 stocks now yielding more than the ten year Treasury bond, you don?t want to be as aggressive on the short side as in past years, when bond yields were 4 or higher.
By adding on a short in the (SPY) here, I am also hedging my ?RISK ON? exposure in the deep in-the-money call spreads in (AAPL), (HPQ), and (JPM), and my (FXY) puts. The delta on these out-of-the-money?s are so low that I can hedge the lot with one small 5% position in the at-the-money (SPY) puts.
If the (SPX) hits 1,280, the (SPY) puts will add 2.25% to our year to date performance. At 1,250 we pick up 4.00% and at 1,200 we earn 7.00%. I now have the option to come out at any of these points if the opportunity presents itself, depending on how the rapidly changing global macro situation unfolds. If we get another pop from here back up to the 1,340-1,360 range, I will double up the position and swing for the fences. There?s no way we are taking a run at new highs for the year from here.
Below, find today?s charts from my friends at www.StockCharts.com with appropriate support and resistance levels outlined. If I may make another observation, when you see the technicals work as well as they have done recently, it is only because the real long term end investors have fled. There are not enough cash flows in the market to overwhelm even the nearest pivot points. That leaves hedge fund, day, and high frequency traders to key off of the obvious turning points in the market. That also is not good for the rest of us.
It?s a good thing that I?m not greedy. If I had sold short a near money call spread for the (TLT) on May 23, I would be in a world of hurt right now. Instead, I went six point out of the money. So when we get dramatic moves like we saw today that take bond yields to all-time lows, I can just sit back and say, ?Isn?t that interesting.? This spread expired in six trading days, which should be enough time to digest the big move today and expire safely out of the money and worthless. What?s better, I can then renew the trade at better strikes after expiration into the July?s and take in more money.
If you are wondering why I am not doubling up on the short Treasury bond ETF (TBT) down here, it?s because it doesn?t have enough leverage. In these conditions you need to go for instruments that can generate immediate and large profits, such as through the options market. The topping process for the Treasury market could go on for another month or two. Until that ends, I am happy to use price spikes like today?s to sell short limited risk (TLT) call spreads 6-8 points out of the money, which can handle a 20 basis point drop in yields and still make you money.
If you own the (TBT) and are willing to take a multi month view, you should be doubling up here. This ETF will have its day in the sun, it is just not today. We could see the $20 handle again and maybe even $30 within the next year. That makes it a potential ten bagger off of today?s close.
I don?t want to touch gold (GLD) or silver here. The barbarous relic is clearly trying to base at $1,500 an ounce. If it fails, it will probably only go down to only $1,450 before major Asian central bank buying kicks in. Better to admire it from afar, or limit your activity to early Christmas shopping for your significant other. We are months away from the next major rally in the yellow metal.
The Roma
Time to Puke Out Again
https://www.madhedgefundtrader.com/wp-content/uploads/2012/05/300px-Italian_battleship_Roma_1940_starboard_bow_view.jpg164300DougDhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngDougD2012-05-30 23:02:052012-05-30 23:02:05My Tactical View of the Market
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