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Monday, February 23, 2009

Short: Gold and Silver

I shorted both Gold and Silver into the close today. Yup. You read that correctly. SHORTED.

I know I know... the world is gonna end and gold must go straight to a kaballion... Oh and silver will go up even more because the gold silver ratio is at ridiculous levels. Money is worthless and there will be super hyper inflation and then we're all gonna die.

Alright, with that out of the way let's move on to more serious business.

The broader equity markets absolutely collapsed today. There was plenty of bad news, that included Citigroup and AIG both pleading for more money. It is absolutely amazing what kind of black holes the world's financial institutions have become.

AIG May Seek to Convert Preferred Shares to Common (Update1): "AIG may need to increase its cushion against losses as the U.S. recession forces down the value of fixed income securities. North American insurers have posted more than $140 billion in losses and writedowns since the beginning of 2007, with AIG representing about 40 percent of the total. The company may post a $60 billion loss, CNBC said today, citing a source it didn’t identify.

The U.S. previously expanded the AIG bailout package to about $150 billion in November, when the insurer posted a third- quarter loss of $24.5 billion. The initial $85 billion federal credit line, provided in September when AIG agreed to turn over an 80 percent stake to the U.S., wasn’t enough to rescue the insurer."

It is absolutely vital to understand just how deflationary all this is. The destruction of money and credit going on here is EPIC. While the Fed and Treasury are indeed bailing these institutions out repeatedly, these actions are not inflationary because they are not PRINTING money or MONETIZING debt. To date the trillions deployed have all been BORROWED. Most of these dollars have been borrowed via the issuance of government debt and the rest of them via complex 'cash for trash' swap arrangements. All this does is suck capital out of other areas of the economy and directs it towards these miserable failures. (A complete waste of time and money.)

It is true that the Fed has threatened to monetize debt by purchasing longer dated treasuries, but they have not yet done so. Even if they eventually do, they would have to monetize faster than the rate of credit destruction just to break even on deflation. That is indeed The Master Plan, but it has yet to be fully implemented.

From a technical perspective both Gold and Silver are extremely overbought. Everybody and his momma is long. Gold did close above $1000, but a Massive Catalyst is Required for a sustained move higher. Today the market plunged on new concerns over Citigroup, AIG, European and Eastern European banks and both Gold and Silver fell. That was the tell. Gold and Silver are clearly exhausted. A significant downward correction in price is pending.

However, this is not a trade without risk. Being short outright via the futures or the ETFs could result in a rather sudden, painful overnight gap up if something big somewhere in the financial system suddenly snaps. This of course is not conducive to proper risk management. Therefore, puts are 'safer' as the premium clearly defines the maximum risk.

The potential reward is definitely large enough.

NOTE: This is a trade and not a 'short Gold and Silver forever to zero' situation.

Gold (GLD): A retracement to the first Fib around $88 can be expected from these overbought levels. This would coincide with the rising trendline off the $69 and $80 lows. Via the Slow Stochachastics, multiple pushes into overbought territory tend to resolves themselves with significant downard price corrections.

Silver (SLV): Silver has gone damn near parabolic on declining volume and has exceeded the 50% Fib retracement level. A correction down to the 38.2% Fib, and the 200 day EMA (green line) is probable. Silver is ridiculously overbought. Nobody and nothing can sprint forever. A short breather is required.

On these trades, stops will be tight and I will only add to the positions as they move onside.

Gold Falls After Reaching 11-Month High in N.Y.; Silver Drops: "Gold fell in New York as some investors sold the metal after a rally last week to the highest price since March. Silver also declined.

Investment in the SPDR Gold Trust, the biggest exchange- traded fund, or ETF, backed by bullion, rose 4.4 percent last week to a record 1,029 metric tons. Gold’s seven-day relative strength index topped 80 on Feb. 20, when the metal touched $1,007.70 an ounce, the highest since March 18. Analysts say a reading above 70 often signals a price drop in the short term.

“That $1,000 level stopped gold,” said Frank Lesh, a trader at FuturePath Trading LLC in Chicago. “Gold is overbought. This isn’t the end of the bull run. You’d rather see a slower, steadier build.”

Gold futures for April delivery fell $7.20, or 0.7 percent, to $995 an ounce on the Comex division of the New York Mercantile Exchange. The price is still up 13 percent this year.

Silver futures for March delivery fell 4 cents, or 0.3 percent, to $14.45 an ounce. The metal has climbed 28 percent this year.

Gold prices dropped as much as 2.6 percent earlier as the Standard & Poor’s 500 Index rose as much as 1 percent before declining. The index sank 6.9 percent last week when gold gained 6.4 percent.

We continue to be wary of a bear-market rally in equities as profit-taking could see gold correct,” John Reade, a UBS AG metals strategist in London, said today in a report. “We merely highlight the risks that large, long-gold positions on the Comex pose to investors here.

Long Positions

As of Feb. 17, speculative long positions, or bets prices will rise, increased 1 percent to outnumber short positions by 165,921 contracts on Comex, the Commodity Futures Trading Commission said last week in Washington. That’s the highest level since July 29.

Still, a pullback in prices may be a buying opportunity, some investors said.

“Gold is about the only commodity that’s going higher,” FuturePath’s Lesh said. “There’s a lack of confidence in paper assets. Right now, the gold ETF is getting a lot of capital that would normally go to a bank or equities. There’s a perception that gold is going to hold its value.”

Gold will rise to $1,050 within a month, up from a previous forecast of $900, Reade of UBS said. The metal will trade around $1,100 in three months, he said. Silver will trade at $15.75 within a month and $17 within three months, according to Reade."


Anonymous said...

oh baby, would i love to see a move back down for a bit so that i could go buy more junk silver and maybe a little bit of gold.

entering into puts on the metals is a play. are silver puts listed every 50 cents at these prices? i forget.

jim sinclair would rather see folks like you taking delivery of physical metal you know. i understand thats not your game.

Anonymous said...

Sorry for being a bit naive, but why can't the government own more than 80% of AIG?
"Faber said the problem is that the government's ownership stake cannot exceed its current 79.9 percent, leaving officials to try and find a creative way to transfer value to the U.S."

CodeMonkey said...

You may be right, but I'll be sitting this one out.

The only way I can see this being a winning trade is if the market starts to improve, or at least plateau.

We just broke down through a 12 year low. It's incredibly likely we'll continue down to make a significantly lower low in the near future. More banks will be nationalized, another country or two will probably pull an Iceland & fall over.

No matter what the charts say, I just can't see myself buying puts on what has historically been the only safe haven during times of such financial turmoil.

As Taleb would say, you're picking up pennies in front of a steam roller. Well, at least you're not shorting! :-)

Anonymous said...

Flight to safety and 50% breakdown in equities probably puts the lie to the charts and chartists. I would not assume that five to ten dollar breaks in the gold price are anything but normal trading wobbles.
Likewise, a 4 cent fall in silver means nothing when the absolute price of silver is still so low vs history.

But, go ahead and buy some puts -- you can help balance that market and keep it from falling over!

Anonymous said...

The fed decided not to buy the long part of the yield curve. It was mentioned in their last statement. They said that they didn't think it would do any good.

One more indication of deflation.

I expect silver to be at about $5 in a couple of years or sooner. I'm short PAAS and waiting to short SLW.

zen_realized said...

My answer to the financial crisis is that the government needs to increase immigration on a large scale. This immigration should be targeted to people that are likely to bring money with them like college graduates. This has the added benifit if done right of solving the social security and medicare problems if the age groups are in the 18-34 range by increasing the number of payers into the system. Essentially what the government would be doing is importing assets as each additonal person increases the size of the economy and results in a positive economic result which is way higher than the cost to import them. It also solves the problem of moral hazard because investments here are actually better economically than unemployment benifits and result in benifits for every single person in the economy. You could argue that each person imported now is worth 10x their initial cost in added asset appreciation and volocity benifit. If people who brought assets with(college degree,cash,etc) the benifit could be as high as 20x. If you spend 50 billion on immigration you get 1 trillion in value and that value goes up the more people you let it now. 30 million immigrants would be ideal after that the benifit starts to level off and eventually decreases.

Anonymous said...

zen has part of a solution: as to spending, high speed rail links ought have been much more built up over the past thirty years: but noooo, autos get the grease....time for that to change, and for the US to get back on the rails, so to speak.

Anonymous said...

If you are going to buy physical precious metals DO NOT buy gold! During the last depression it was illegal to own gold (except wedding rings & etc.). It was confiscated at a price of $25/ounce, then the gubbermint promptly raised the price to $35 / ounce.

Ben Bittrolff said...

Code Monkey

"As Taleb would say, you're picking up pennies in front of a steam roller."

Ninjas can totally dodge steam rollers.

Anonymous said...

do you assume only AIG and CITI are black holes?...maybe we are all in either a black hole
or black hole experience
and only a few know it....? (a black hole has no bootom) maybe it is now time to cleanse (detox) and remove all parasites and simply re-boot...

shiloh1862 said...

looks like you nailed this one

Vijay said...

Ben you are my hero.

CodeMonkey said...


What do you think about oil ( specifically DXO ).

It seems like we've tested & held the recent bottom of about 1.75 and have been making positive gains lately.

none said...

This is a selffurfilling prophecy:

(RTTNews) - Gold prices plunged lower on Tuesday as traders bet the recent rally was overdone. With the drop, gold retreated away from the $1,000 an ounce mark.

It could be the start of a bigger correction though (the B move = down):

Or catapult gold to 1200 in an instant because of short covering.

Anyway, the big picture remains the same: people flee to gold because of the turmoil, caused by the deflationary collapse of the financial system.

And roubini, who's been spot on since 2007, thinks the worst of this turmoil lays ahead of us.

So pick those pennies (or even dollars), if you can, but watch out for the steam roller.

So does he think, as some are saying, that the worst phase of the financial-system meltdown may be over in the US, while here in Europe the worst may be yet to come? Not a bit of it. "For the US, I don't think we are out of it in any shape or form. Most US banks are insolvent and will have to be taken over by the government. I don’t agree with the idea that the worst is behind us." Europe, alas, "is pretty much a disaster," he agrees in an interview with bne. "The economic recession in the Eurozone currently is as bad, or even worse, than the US and now there is a severe hard landing in many parts of emerging Europe."

Matheus said...

If the US borrows, they do that with interest.
To pay that they must create more money from thin air, so they will borrow more money, how this is not inflationary ?
Also, US has lost its control over the dollar.
Gold it is a good bet until interest rates rise again.

Robertm73 said...

Perfect pick.

Anonymous said...

I'm still shorting.

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