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Monday, March 9, 2009

Short Gold and Silver: Let It Bounce

"A bet on gold is essentially a bet against all paper currencies." -Hedge Funds Turn to Gold

Yup. I'm still short Gold and Silver... and I like it. A lot.

As expected Gold fell to the rising trend line and the firs Fib from extremely oversold levels after briefly spiking above that psychologically important level of $1000. The current bounce has lasted two days and has occurred on weak volume.

The bounce should run out of steam around the $950 - $960 area. Failure to get that high before rolling over would be an encouragement to add to the short position. A move to the old high opens the 'Double Top' scenario and increases the risks dramatically of move to new highs. A tight stop just below $1000 is therefore prudent. (Never let a winner turn into a loser.)

I especially like this trade because it is a crowded trade. Oh yeah, and betting against all fiat currency regimes simultaneously as the entire globe goes into a synchronized deflationary spiral is hilariously futile.

Hedge Funds Turn to Gold: "Hedge fund investors who made money last year by betting against investment banks are now buying gold as a way of betting against central banks.

The gold bulls include David Einhorn, founder of hedge fund Greenlight Capital, who last year came under the spotlight for his short selling of shares in Lehman Brothers, after arguing that the bank did not have enough capital to offset its exposure to falling property prices. Other funds looking at gold include Eton Park and TPG-Axon, investors said.

Barrick founder sets no limits on gold price - Mar-08In depth: Hedge funds - Jan-27In depth: Global financial crisis - Sep-04Their belief in bullion is being expressed even as gold prices have retreated from last month’s break above the $1,000 an ounce level. Spot gold in London closed last Friday at $939.10, after falling last week to $900.95 an ounce.

Investors such as Mr Einhorn are turning to gold because they are worried about the response of the US Federal Reserve and other central banks to the global economic crisis. A bet on gold is essentially a bet against all paper currencies."

Related Posts:
Short Gold and Silver: It Will Only Get More Interesting
Short: Gold and Silver, Just Getting Started
Short Gold and Silver

14 comments:

Irrational Doomsday Blog said...

"Oh yeah, and betting against all fiat currency regimes simultaneously as the entire globe goes into a synchronized deflationary spiral is hilariously futile."

Are you of the opinion this is a timing thing though? We're deflating now, with a ways still left to go. But with every central bank doing every reckless thing they can, I can't see a bet against these currencies as wrong in the long run.

I don't even know that deflation will squeeze gold that far from where it's at- the worse it gets in monetary intervention, the more the gold bugs are going to be buying, regardless of deflation.

Anonymous said...

For me, a goldbug, I have the gold in my possession well below current prices, and I am now much more concerned about my trading account. I have started layering in shorts and am now out of gold stocks on my trading account.
Friday's action on the HUI did not look positive, walking into, but not penetrating the short ambush through the 50% retracement area.
It looks like gold is "rolling over". It could not even get through the 38.2% area.
Doesn't now look like the bounce to the 950-960 area is going to happen !
If you are already short around $1000 great for you.I can't go short here with a stop around $1000 and so its short GG,ABX and hope for a bounce in things like SLW, PAAS and KGC and AEM.
The shares are not signalling any strength in the PM prices.
You are right so often I can't ignore you ! LOL
Josh

absoluteanni said...

"Oh yeah, and betting against all fiat currency regimes simultaneously as the entire globe goes into a synchronized deflationary spiral is hilariously futile."

With all do respect, I think betting on fiat currency regimes (i.e. governments ) to figure a way out of this mess is hilariously naive.

I buy the deflation argument. But I don't but the argument that ALL asset prices go down. Most will, but the kinds of assets that cannot default will not go down.

Government paper can default. And currencies can collapse. Look at Iceland. That's a deflationary phenomenon. I bet people in Iceland would be quite happy to have owned gold...

humble opinions...

none said...

I think that it's very tempting, for a trader, to short gold. Because it is (or can be) a very emotional investment: people invest in gold because they're afraid and/or because they have a 'holy' belief in gold. The latter are the ones that don't possess gold. Gold possesses them. And it often leads them into the ditch (central message of Bernstein's 'The Power of Gold').

So shorting gold is the ultimate 'emotionless' investment decision. And that's what a good trader is: emotionless.

I'm currently a bit short myself (although I keep my long position and I'm going to add to that position). Because I think we've begun the B-phase in the cycle:
http://www.kitco.com/ind/Aden/images/feb232009_1.jpg. And that phase can last a while (months).
870 is a possible target (65 weeks average). Even 550 can't be excluded. After all, gold halved in the mid 70ties, in the midst of an epic bull market.
http://www.gold-eagle.com/editorials_05/images/saxena021507a.gif

Shorting USD gold (via a USD vehicle) might be very interesting, because I'm a EURO investor. And some say the EURO is about to plunge. Or put differently: the USD is about to soar (further) versus the EURO. That could drag USD gold down. A lot.

http://www.nakedcapitalism.com/2009/03/traders-betting-on-euro-plunge.html

Anonymous said...

you suggests betting against David Einhorn...........

Anonymous said...

@absoluteanni
Anyone living in Iceland would have been happy owning any non-Icelandic asset, be it dollar, euro or gold.

absoluteanni said...

"@absoluteanni
Anyone living in Iceland would have been happy owning any non-Icelandic asset, be it dollar, euro or gold."

I understand that. My only point in bringing up Iceland is to dispel the myth that all assets decline in deflation, which is the basic thesis for shorting gold going into a deflationary collapse.

I just want to point out that during the Great Depression, gold went up against all currencies, whether the currency was backed by gold or not.

none said...

BTW, Ben, the reason you give for shorting gold is, as I said before, probably nót valid.

Einhorn thinks, in contrast with what your quote suggests, exactly the same as many 'goldbugs': that gold will (continue to) do well in a deflationary environment:

"Our guess is that if the chairman of the Fed is determined to debase the currency, he will succeed. Our instinct is that gold will do well either way: deflation will lead to further steps to debase the currency, while inflation speaks for itself."

http://www.businessweek.com/investor/content/jan2009/pi20090128_208724.htm?chan=rss_topStories_ssi_5

Doug said...

A lot of the gurus telling everyone to buy physical gold are people that stocked up when gold was 300$ an ounce and are trying to sell it at the best price they can get.

It wasnt that long ago...

getyourselfconnected said...

Long time reader, first time poster!
Love the blog, I do envy your trading acumen.
As a gold "long" I appreciate a alternate viewpoint to roll around in my head. I was wondering if you had a take on the almost on cue 10am dump of gold every morning on the NY gold exchange? Is that shorts or a eastern europe central bank dumping gold? Any insight is appreciated.

my10000dollars said...

What do you know about GOE? It seems to follow gold index but it's sky rocketed in the last few days. Is this a short potential?

Anonymous said...

I have enough gold in my possession to see me through a melt down of the financial system. I don't even think about its value. I have mostly coins, krugers, maples, pandas, sovereigns, Austrian ducats, Australian nuggets, eagles, and many of these down less than an oz. Also I have a few 1 kg bars. I could open a coin dealership if I wanted ! You can't get a lot of it today. I am told sovereigns are impossible to get now. The US mint has cut its production of gold eagles from 2,055,000 in 1999 to 710,000 in 2008 with 109,500 buffaloes, under half its 1999 production. The mint is part of the system. The authorities do not want you to own gold so they get the mint to ration it. The gold price suppression is to keep down interst rates (Summers and "Gibson's Paradox" and that is why Summers is there !) The idea is to be able to produce loads of dollars without interest rates going throught the roof. The US Mint's production is not going to go back up .
Now the preminums on all that coinage is on the up and up. The smaller the coin the bigger the premium. There is no way I would sell any of it right now. The public are not in the gold market.
My trading account is paper or digital, so I see no harm to play the paper gold game which means going short from time to time.
Now gold on the daily chart or 8 hr chart is still within the uptrend-channel, and until it breaks through that into the 890-880 area it is still in an uptrend ! As a short I am watching it like a hawk ! I know there is big buying lurking in that area. The recent drop is being engineered. Check out the lease rates last week! So the gold was being given away ! Who goes short ? Well if it isn't those banks who do not have to put up margin ! Also the same banks in serious trouble ! JPM is the leader without doubt. These are banks with a huge naked and under water short position already, although JPM is a sub-custodian for GLD which is structured so that there is no audit of sub-custodians !! Draw your own conclusions ! The same crooks that have brought us to the brink, are also the same ones up to their armpits in the gold market ! It is the physical market which is going to overwhelm the paper market. It is very risky going short in this environment. There is a risk of an explosive short squeeze at any time. JPM is insolvent, but does not have to report it because it is a matter of National security !!?? JPM has a $90TRILLION derivative book. It's share price says that is going to blow up. When (not if) that blows, what then their gold position ?
Josh

123 123 said...

Great post you got here. I'd like to read something more concerning that topic. Thanx for sharing this material.
Joan Stepsen
Gadgets and gifts

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