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.
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