Shamik Bhose The Reckoning For Gold

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Why gold remains a good bet to invest in going forward to 2010

Why gold remains a good bet to invest in going forward to 2010

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  • 1. The Reckoning of Gold: The Money Men The more I look at this market, the more I am seeing certain patterns that are very disturbing regardless if you are long or short. The algorithm traders are going after systematically ripping apart any paper trade that has liquidity and milking their traders and holders for all their worth. Algo based funds alone would not be a problem is it was a level playing field with transparency, but certain fund managers like GS for one have inside policy decisions and privileged access to trades before the they become available to the general public. Combined with the monetization of the Treasury market, and you are dangerously approaching a no bid systematic lock up in all paper debt and equity as large players literally start cashing out for cash and then hard assets to park that cash in the devaluation of the dollar continues; with a possible undeliverable situation in the futures commodity market large players start demanding immediate delivery and margin requirements for contracts exceeding 50%. Timing is tricky, first taste in early 2010 which should be band aid over in 3-9 months, and the big event sometime on either side of 2012. The FED/Treasury/BOE will try and keep interest as low as possible throughout this fiasco which will have a brutal impact on the unemployment situation as most businesses and local governments will be strapped simultaneously with dramatically rising costs and lower revenues. It's nice the government is trying to support real estate in USA and the UK even as more and more people are unable to pay the basic utilities, taxes and insurance. The paper trading game looks worse and worse each day. This sudden optimistic outlook is putting aside the impacts of the H1N1 flu and any severe global problems like war or natural disasters. ……… The Honey pot The rally in gold is bearing all the hallmarks of a classic bull market. We are breaking higher after solid consolidations that do enough to flush out a lot of loose length. The breaks occurr quickly preventing many from re-participating and this is all happening at levels of vol that none of us would have thought possible ie 1mth still trading sub 20%. When we last had spikes in price above 1000 over the last 2 years we saw vol spikes to over 40%. On Friday morning we traded 1104 and this morning we trade at 1148, new highs. Its difficult to pinpoint why the volume is so low but its certainly suggestive that the market is comfortable at these prices. It may be that the buyers involved since the summer are predominantly longer term with deeper pockets, ie Corporate buybacks, Central banks, institutional money while the more short term spec money of bank dealers and levered funds is no longer as significant as before. I certainly feel that most of the latter are trading in much smaller size than before after a fairly unpleasant two year range. Although Comex length is at records it seems more model/CTA length where positions are fairly stable as long as the trend is steady, indeed dips are shallower because the systems accumulate into dips.
  • 2. Also the market psychology is getting interesting. There are of course the die hard gold bulls but there are large numbers of gold bears who resolutely believe the rally is mistaken and are effectively vocal about it using terms like bubble and hyped. However there is a growing margin looking at macro policy developments alongside supply restrictions with the most important being central banks turning from net sellers of 20% of annual total to net buyers. This is critical if sustained as the investment demand into the ETF and from real money etc cannot be satisfied from mining supply which is nearly all taken by the jewellery and industrial demand. Jewellery demand will have to fall dramatically with scrap supply increasing…OR the price go up to levels that inhibit investor demand. I think we are a long way from determining what this price is to change the trend. Gold volumes with action a touch higher in the front, and a few buyers coming out of the woodworks with spot above 1140…. Again, the rally is "too orderly" and the lack of realised volatility and a massively underperforming risk reversal makes the market reluctant to pile on fresh new long option positions…………..be careful The Rainbow across the Hill Remember every action has an opposite and equal reaction. Quantitative easing, monetization of the debt, toxic asset subterfuge all have a heavy price to pay to the real economy. Here is an analogy by a sage commodity trader…….If a doctor has a patient that he diagnosis cancer on. A nasty painful tumor. And the doctor gives the patient morphine to take for the pain....but the patient instead of getting surgery for the tumor and enduring the pain of surgery and the recovery and the painful radiation......decides that the morphine is so helpful they take more morphine. They feel great....as time passes.......the tumor grows larger and the patient is completely addicted to the morphine. Now the patient has to have a much more difficult surgery with a much greater rehabilitation time and very very painful recovery due to the morphine addiction. If only the patient had taken the pain initially and had the tumor removed. Well......that is where we are ....if we had taken our pain last year and gone into deflation and cleared our economic tumor we could have recovered and started over in only a few years. But our "morphine' by Dr. Ben is toxic and the price we are going to pay will be severe as our addiction AND tumor grow. Those of us that lived by the rule of economic responsibility with little or no debt are going to be punished severely by the coming stagflation and must try to make it through the next two years. Buckle down. …………….. I like physical gold and silver. For those inclined to play the market here keep trading the timing and hope we get a little pullback.....I am not looking for gold to break more than 5% pullback. But then so far it has given us little. They are just animals lately and someday will really roar. BTW Gold will get to over 3,000 maybe 5,000 before it finally comes down hard on all of us………………..you never know
  • 3. Best regards Shamik Bhose Executive Director Commodity & Currency & Interest rate futures Markets Microsec Commerze Limited Www.microsec.in ; www.commoditylive.in Phones 009133-30512100 / 30512139 -40 Fax 009133 -30512020