Mining for Gold

With Friday's big move in the shiny yellow stuff, a good deal of noise is being made about the future of the gold sector. Recent price action suggests that this is a rally in a bear market, and we're approaching overhead resistance. Moreover, the recent rise was substantiated by weak volume, suggesting little conviction amongst buyers. In its favor, the sector made a higher low in the recent wave of selling, which suggests relative strength to the overall market.

Fundamentally, there are many reasons to like Gold and its producers, things like the new Citigroup bailout come to mind. Nevertheless, if the credit crisis persists (read: Paulson's strong dollar policy), then gold's luster will remain tarnished. With questionable technicals and murky fundamentals, this is a risky long, and a potential short until further notice.

Blamo!

The market shat on the bulls Friday, which made tons of cheddar in SRS, SKF, TWM, DXD. UDN, FXF and FXY are trading at all time highs, and continue to show strength as the markets weaken. Commodities were mixed as DBA moved lower w/ USO, and the precious metals IAU and SLV remain unchanged. GDX, EEB and SLX collapsed today, falling between 2 and 4%.

If the emerging market continues to weaken, I suspect we will visit the January lows, so keep the long trades hedged, or on a short leash. If EEB stays below 50, I will either exit or reduce my position. I'm still market neutral with a short dollar bias, but if the XLF can stay below 26.20, I will increase my position in SKF. Banking indexes have fallen roughly 7% in the last 2 days, and look poised for further deterioration.

IAU and SLV continue to offer a safe haven in this fiasco. Even though they are trading at lofty nominal heights, adjusted for inflation, there is plenty of room hard assets to run. Right now the Dow @ 12300 is worth ~13oz of Gold @ 960. I suspect this ratio will continue to favor gold, considering that sometime in 2000, the Dow was worth more than 40oz of Gold when it traded ~300. Peter Schiff predicts that the fall of paper equities will bring the ratio to a 1:1 parity, and points to the 1970's as a similar phenomenon. This implies a DJIA trading @ 5000 w/ Gold @ 5000. While I'm not quite as optimistic (pessimistic?) as Peter (not yet anyhow), 5:1 seem achievable without much difficulty. Dow @ 10000 and Gold @ 2000? Sounds good to me.


On another note, what happens when a civil judgment is entered against you in NYC for public urination?

Before the Open

It has been a helluva week... Finally found a good pot dealer in the neighborhood, some super duper smoke, so I've been doing a lot of photo editing and not too much trading. I have a comment from a wise trader who caught the huge reversal in financials trading UYG, a solid counter trend move that I have much respect for, and seek to emulate in the future. My macro perspective of the market (weakening American economy in real estate, finance and discretionary) hindered my ability to see the obvious out performance of the aforementioned sectors in the recent mess. I got burned shorting real estate in the reversal, SRS from 130-122, though I've bought it back ~107, SKF ~102, and SCC ~94. What really caused my surprise was not the correction in SRS, but rather, the lack of upside in GDX (which proceeded to happen the next day), which gave me a helluva scare. Needless to say, I'm short the usual suspects via SCC, SRS, SKF and long precious metals via GDX, GLD and SLV yet again. Yen and Franc will continue to strengthen over the next few months as the mess spreads. IBKR had great earnings once again, but continues to struggle in the lower 30's, I guess it is hard to swim against the current. I'm still keeping a small position in BPT, huge dividend, and solid looking chart touching support. I'm also a tiny bit long energy and basic materials via UYM and DIG, but I expect to close these positions Monday, seeing as I was using them to hedge my bets over the weekend.

Market Metaphors for the Maligned and Miserable Market Mavens

This past weekend I got drunker than the American consumer, only to find myself locked out of a friend's apartment like a depositor in a bank run. Like Mike Shedlock, I rang the bells and made some calls, but too no avail, for my cries fell upon unattenuated ears, similar to the monkeys on Capitol Hill. A companion gave me a boost as strong as a 100bps slashing of the fed funds rate, enabling me to swing high up on a fire escape like the October 2007 market. I pounded on the windows and screamed louder than a retiree looking at their 401k this coming Tuesday, hoping to wake my host, who was as unresponsive as the risk managers at Merrill. Apparently I was peering into the wrong apartment, because I was chastised by a neighbor, reminiscent of a dialogue between Peter Schiff and Tom Atkins. "What the fuck are you doing on the fire escape," said the would be Peter Schiff. "Errrr, ummmm, dahhhh," I said with my best Tom Atkins impression. Thankfully, my slumbering friend had arisen in the great cacophony, and opened the door (please insert metaphor). Like a fool, I could have used my pals window to enter safely, but I got suckered into talking the fire escape down. Like the mortgage backed securities market, the ladder only budged in fast and jerky downward motions. Finally, when I assumed things were safe, I got on the ladder, only to be shocked like a value investor who is looking for a bottom in MBIA. My foot was slammed by the metal rungs, caught between metal and a hard place, much like the Federal Reserve in periods of stagflation. More battered and bruised than the emerging markets, I finally made it to the ground, and hobbling into the apartment, which offered about as much relative safety as utilities. The next morning, there was the inevitable bit of swelling that comes with such accidents, but like a market bounce, it didn't last too long. Sadly, authorities had been notified, and my host was rather perturbed by the whole affair, making me as popular as Angelo Mozilo. Good luck Tuesday, ya'll gonna need it.

I don't know what tomorrow will bring, though I expect some high volume capitulation a la August 18th some time this week. Luckily I sold my GXC Friday for a nice 1-day 3.5% gain, though I may have shot myself in the foot by covering SLV, and buying a little GDX. I'm still short gold, and I will probably purchase some SCC and SRS if they make new highs on Tuesday. The blood in the emerging markets is impressive, but we are a long way from rivers of red in the street. I suspect there is a great deal of panic at leveraged hedgies unwinding unsustainable trades, but that is idle speculation. Yen and Swiss Franc are the safest bets in these environments, as carry trades unwind. I guess there will be strengthening in the USD as well, but I can't imagine how long that will last, for I believe the powers that be will try and inflate our way out of the remarkable trade deficit we've amassed over the years. I know I've been calling for a bounce for a few days now, and it hasn't materialized. This has been a bit of a lesson in the "trade what you see, now what you believe department," and I hope to improve my trading as my longer term macroeconomic thesis of American economic collapse comes to pass.

Pitiful Pitfalls Prevent Profits

Trading has many advantages, but articulating long term strategies is not one of them... Though I expect good things from the precious metals sector over the next year, today is the second day of high volume downwards action, confirming my thesis that there is a short term top in gold ~900. I've sold all my precious metal related stocks (GLD, SLV, GDX), and have gone short for the time being, who knows when this market will find a bottom. In the "one that got away department", INTC numbers fell sufficiently short of the nervous markets expectations, and the semiconductors are getting pounded (SSG). Agriculture seems to be following gold, and thus I've moved a good deal of my positions short, in cash, or in the yen. Blogging and trading might not mix too well, it is difficult to time recommendations to a reasonable degree in which the remain profitable for weeks to come, not just a few days... I will have to figure out a better method... I'm hoping the Chinese indexes continue lower... they appear to be headed to my long term bargain zone. Using linear regression, I think FXI will be attractive ~120.

Interfestering

It has hardly been a few days since I posted my bullish thoughts on GLD, but what a difference a few days can make... With such a sharp run up in GLD, things looked good this morning as it continued to make new highs... but there was a sharp sell off today, but more importantly, it was on HIGH volume... FOUR times the 3 month average. This is not a good short term sign, and I will be monitoring this closely with the expectation of cutting my gold position in half. Though I still feel it is a very good place to be in the long run, the recent price action has gotten a bit ahead of itself, and with the Fed Futures already pricing in a 50 bps cut, I can only assume such expectations are baked into gold as well... Long term investors shouldn't be too worried, but it looks like the short trade is more viable in the near future, probably indicating a new consolidation range. This will also have a negative effect on the more volatile miners with whom I have placed much faith... needless to say, I'm not trading to be right, but to make money, and thus it may be prudent to take some profits off the table and watch from the sidelines... This mean I will be cutting down on silver (SLV), DBP, HGU.TO and GDX if negative price action persists, all of which I have had a great run with over the last month... I expect GLD to move to 83-84 over the next few weeks.

Mid-Day Musing

Surprise surprise, precious metals and related miners are up, retail, financials and real estate are down, and both the Swiss Franc and Yen continue to show strength, even though the market is posting a moderate move to the upside. A tip of the hat to Mike Shedlock, who has a great post over at MGETA related to my rant about AXP. We share the same view of the credit card debt industry, and he has some very nice charts confirming my thesis of the next wave of financial disaster.
There has been some great performance by GDX and SRS this morning, but the real winner is HGU.TO which returns 200% of the S&P/TSX Gold Miners Index. HGU.TO has been on a stellar run in the past couple of weeks, up 40% since mid December. Anyone following GLD's bullish pennant could have guessed HGU.TO was due for an enormous move, especially after its break past 28. It is still making all time record highs, and continuing upwards at an incredible pace. A pairs trade long HGU.TO and long SRS (200% inverse of Dow Jones Real Estate Index) could prove quite valuable, providing some relative market neutrality.
As always, 7% trailing stops are a wonderful way to avoid major mistakes; leveraged ETF's tend to be incredibly volatile and costly when they are entered during consolidation periods.
Keep an eye on BPT, an oil trust supposedly yielding 11% with a great looking chart, and a recent breakout above 80.
Other movers include SSG with a much needed 5% pullback, probably due to renewed strength in Intel (dead cat bounce?). Semiconductors have been leading this market down, and I see no reason (yet) that this trend should end. With Intel's numbers coming out soon, perhaps it is best to wait on the sidelines and short any strength that may come from earnings week.