I Have Gone Short Gold

[whojamaflip]

I have just bought a July (it actually expires end of June) 840/800/760/720 gold put condor. It pays out on a maximum 6-1 basis, but I can't lose more than my stake.

you will lose your 'stake'.

reasoning.

1) india buys around 850 which gives support above your first strike.

2) a lot of scrap coming to market in the past months has dampened any rally that might have happened, but pressure is to the upside, not the downside.

3) investment in mines means gold production wont be picking up anytime soon.

the general economic situation is no different, and wont be different in june. Gold has gone sideways for the past 12 months, would likely go sideways for another two months also.

the smart money would go on $900-$950, the smarter money would buy physical for the long term.

[Extradry Martini]

Please enlighten me on why the bull arguments are not concrete? I am not asking this to be pedantic, I genuinely want to know if you have a reasoned argument against gold performing well in the future that I can believe.

No, I don’t believe you are arguing for the sake of it, but I have given you plenty of reasoned arguments – the main one is that this is a deflationary recession, not an inflationary one, and that if confidence returns to the banking system, the price of gold will fall, as it was worries about banks which drove it higher in 2007 (not worries about inflation). Even if you believe for some reason that inflation will be high at some point in the future, if you understood the transmission mechanism of inflation, you would also understand that a prerequisite for this scenario is a banking sector recovery and a recovery in confidence, both of which would drive gold prices lower first. To then say that you don’t care how low gold prices go and for how long they will stay there is simply not good reasoning and a terrible investment strategy.

What is happening right now is deflationary – we do not know how long it will last or how deep it will be. Until we do, there is absolutely no reason to be long of gold at these levels unless you believe that the government will let the banks all fail – and I can see no reason why anyone might think that.

BTW, I don't doubt your technical analysis on the charts, it is not an area of expertise I possess and I am sure technical analysis can often be right under typical market conditions. But we are now in very volatile and unpredictable times, where I believe you can probably throw your traditional technical analysis out of the window. We are in uncharted water, making predictability based on what has gone before very likely to be prone to significant error.

Actually, technical analysis as a tool has markedly increased in efficacy since this crisis began for two reasons. Firstly, what it deals with is the impact of cognitive bias and emotion on prices and because there has been a huge amount of this over the period. Secondly, like any other analysis it becomes more reliable the fewer people there are using it, and there are certainly fewer people trading these markets now from a technical basis.

[Extradry Martini]

you will lose your 'stake'.

reasoning.

1) india buys around 850 which gives support above your first strike.

2) a lot of scrap coming to market in the past months has dampened any rally that might have happened, but pressure is to the upside, not the downside.

3) investment in mines means gold production wont be picking up anytime soon.

the general economic situation is no different, and wont be different in june. Gold has gone sideways for the past 12 months, would likely go sideways for another two months also.

the smart money would go on $900-$950, the smarter money would buy physical for the long term.

Interesting – thanks for the view.

1. What do you mean here by “India” – the government/central bank or jewelry makers?

2. Pressure from what?

3. What do you mean here? Investment in production tends to increase production, no?

On your last point, it’s not economics which drives price change, it’s positioning. Though the latter is often driven by the former, the distinction is very important, especially over shorter time frames and especially with commodities like gold which have little utility. Besides, if the economic situation were to remain unchanged that would be a pretty good result and a big boost to sonfidence in the banking system, which of course would drive down gold prices.

As for where the "smart money" would go, what gives you that valuation, and how far do you think it will drop before returning there.

[Number79]

EDM, you know that I also believe that gold is a sell over the summer. Short term I fully agree with you, don't believe we will go sub 800 but we shall see. What I do not understand is why you have to go on the assault over gold even when talking long term.

Do you really believe that this is it? the economy will recover shortly? unemployement will reduce? banks will start lending? people will start spending? reposessions will stop? foreclosures on banks books won't be an issue? industry recovers? sterling gets out of the woods?

Eventually, all may be fixed but not for some time. Do you not believe this to be a bear market rally? It would be easier to see your points if I knew what you expect.

I also answered your post in the other gold thread where most of the same arguements are being raised.

[Extradry Martini]

EDM, you know that I also believe that gold is a sell over the summer. Short term I fully agree with you, don't believe we will go sub 800 but we shall see. What I do not understand is why you have to go on the assault over gold even when talking long term.

Do you really believe that this is it? the economy will recover shortly? unemployement will reduce? banks will start lending? people will start spending? reposessions will stop? foreclosures on banks books won't be an issue? industry recovers? sterling gets out of the woods?

Eventually, all may be fixed but not for some time. Do you not believe this to be a bear market rally? It would be easier to see your points if I knew what you expect.

I also answered your post in the other gold thread where most of the same arguements are being raised.

I do actually agree that this is a bear market rally in stocks (though I am long of them and intend to remain so for a while as long as it doesn't break down), but you have to understand what drives gold prices. It hasn't been the recession per se (as that is bad for gold prices), but the fact that at the margin people have been worried enough about banks to take their money out and put it into gold. Now, there are only two fundamental reasons for much higher gold prices: rising inflation expectations and rising expectations that the government will simply let the banks fail. In order for the first of those to happen, we need an economic recovery such that demand meets supply (we are a long way from that right now, as you point out) and it seems to me it is very unlikely now that the banks will be allowed to fail. So there is no fundamental reason to buy gold any more. There is a possibility that China will start buying more at higher prices than this, but why should they and why do it now? If they do it in 2 years time, gold could be at 500 by then and they merely drive it up to 650, so that's certainly not a reason to buy gold now...

[Georgia O'Keeffe]

So what are you seeing in the charts which makes you so bullish over the short-ish term? Again, what is your rationale for buying gold here? Also how on earth can you derive a rally like that followed by a bigger fall from technical analysis?

My technical read, for what it's worth, is that gold has very firmly left the upward channel it was in from October to March and may well have started a new downward channel and if we go a little lower from here (say 865),it will have broken a head and shoulders formation which implies 710 as a target. If the 700 level is then breached then it ompletes the larger double top formation (of March 08 and Feb 09), implying a further move down to 460.

So, what are you seeing?

i use a number of different technical indicators but for longer term views predominantly waves because they work very well for me, its clear to me that the first leg up in the gold bull market is from feb 01 to Dec 07 and since then it has been tracing out a corrective consolidation pattern. Now when i look at the gold chart with monthly data points The high in Dec 07 does not have any divergences in the technical indicators, as such imy favoured projection of this correction is an expanding flat, i also like the idea that March 08 thru to now is developing an inverse H&S which gives me the 1250 projection.

I then expect the 500-550 price as the last part of the expanding flat probably sometime in 2010 or 11 this will complete, which will be a bog standard fib retracement of the whole wave 1 rally, at that point i think gold will go through the roof, ive had this "expanding flat" view on gold for about 6 months and up to now nothing has happened to invalidate it

The above also ties in with my stock market view nicely which i see as about to turn down and head to a new final low circa 3000 over the coming months that will lead to the mother of all bear market rallies taking it back over 5000 in the first half of 2010 before it then collapses and heads sub 1000

Edited May 1, 2009 by T De Lempicka

[endgame]

i also like the idea that March 08 thru to now is developing an inverse H&S which gives me the 1250 projection.

This is what Im hoping for, or a cup with handle pattern which is now at the lower part of the handle. If we complete the handle from here, then a breakout to the upside is probable.

saying that, I the EDM is right in his view of the banks etc.

see this also

http://www.youtube.com/watch?v=y7WX63tWRnI

[whojamaflip]

Interesting – thanks for the view.

1. What do you mean here by “India” – the government/central bank or jewelry makers?

The indian gold market doesnt consist of the CB & jewelers. I mean small time farmers who sell their crop & buy gold, if you are short the market you need to know where support levels are.

2. Pressure from what?

Market pressures. physical ETFs, jewelry, private 1oz coin, kilo bars on the long side. suppliers and short sellers ..short

3. What do you mean here? Investment in production tends to increase production, no?

On your last point, it’s not economics which drives price change, it’s positioning. Though the latter is often driven by the former, the distinction is very important, especially over shorter time frames and especially with commodities like gold which have little utility. Besides, if the economic situation were to remain unchanged that would be a pretty good result and a big boost to sonfidence in the banking system, which of course would drive down gold prices.

As for where the "smart money" would go, what gives you that valuation, and how far do you think it will drop before returning there.

I mean "lack of" investment in mines. gold output is mostly coming from scap refiners, gold being dug out of the ground is not increasing (to keep up with demand).

all told, i dont see and reason to short gold generally, let alone to a $40 band.

[Extradry Martini]

The indian gold market doesnt consist of the CB & jewelers. I mean small time farmers who sell their crop & buy gold, if you are short the market you need to know where support levels are.

Market pressures. physical ETFs, jewelry, private 1oz coin, kilo bars on the long side. suppliers and short sellers ..short

I mean "lack of" investment in mines. gold output is mostly coming from scap refiners, gold being dug out of the ground is not increasing (to keep up with demand).

all told, i dont see and reason to short gold generally, let alone to a $40 band.

My goodness, what a load of made-up, arbitrary, nonsense.... I took you seriously for a second there. More evidence that the forum goes loony after 5pm on a Friday!

However, it's not completely in vain - I guess that if these are the arguments against my position, I should be raising my confidence level in it.

Oh, and by the way I very much doubt I will be runnning my position to expiry - it is (rather obviously) a way of levering in to other ways of expressing it if the rough direction is right - but it does have to have meet the stand alone risk/reward threshold at inception. Also, the band is not $40 it is $69, but never mind...

Have a good weekend everyone!

[tomwatkins]

I have just bought a July (it actually expires end of June) 840/800/760/720 gold put condor. It pays out on a maximum 6-1 basis, but I can't lose more than my stake.

The reasoning is simple. The price of gold is high right now because of recent aversion to banks. That is probably now slowly reversing. On top of that, the world and his wife is long of gold expecting it to rise for now tired and easily-accessible fundamental reasons which if they ever happen are stories for 2 or 3 years time, not now. Technically*, I believe that gold has entered some form of bear trend (lower highs and lower lows), and we are reasonably close to the top of the channel.

Of course, I could easily be wrong - I only put my confidence ratio on this trade at 3:2. But by doing this in a bought put (which are absurdly cheap - an argument for the bear tyrade in itself) structure, I don't mind too much if it goes wrong - and if the bulls do turn out to be right, then it could rise by a lot, but that makes no difference to me.

However, given that my confidence ratio of 3:2 and my payout ratio of 6:1 give me a risk/return ratio of 9:1, I can't afford not to put it on. On top of this, if the market starts trading my way in a significant way, then it will raise my confidence ratios enough to start adding to the position. I'll let you know in a few months time how I got on.

Edit1: I wrote this in a hurry before leaving last night and wrote the expiry month wrong. The options are July options, exiring end of June, on the August futures contract (now corrected above).

Edit2: I forgot to mention that part of the reason for thinking this is that gold did not rally - at all - on Monday when the swine flu news hit all the other markets. If something can't rally on good news (for it) then it doesn't suggest to me that it is going up for any other reason...

What do you think about the news that China is thinking of increasing its holdings from just over 1,000 tons to 5,000 as one of their finance ministers said recently?

[Extradry Martini]

i use a number of different technical indicators but for longer term views predominantly waves because they work very well for me, its clear to me that the first leg up in the gold bull market is from feb 01 to Dec 07 and since then it has been tracing out a corrective consolidation pattern.

Perhaps - I have no view on this.

Now when i look at the gold chart with monthly data points The high in Dec 07 does not have any divergences in the technical indicators, as such imy favoured projection of this correction is an expanding flat,

It had a massive divergence on the weekly and daily chart though, and the 08 peak looks terrible from that perspective in all 3 periodicities...

i also like the idea that March 08 thru to now is developing an inverse H&S which gives me the 1250 projection.

Now, this is one thing I really can't see - if you are measuring March 08 to now, you have a stronger right shoulder than left shoulder which invalidates it. On top of that, the formation is a trend reversal pattern and the market was trending up, not down prior to March 08, and the neckline is ascending, not descending. On top of that, the first rule of a head and shoulders formation is that it doesn't exist until the neckline is broken. So, it looks like you're barking up the wrong tree here.

I then expect the 500-550 price as the last part of the expanding flat probably sometime in 2010 or 11 this will complete, which will be a bog standard fib retracement of the whole wave 1 rally, at that point i think gold will go through the roof, ive had this "expanding flat" view on gold for about 6 months and up to now nothing has happened to invalidate it

Again, I have nothing to say either way on this.

The above also ties in with my stock market view nicely which i see as about to turn down and head to a new final low circa 3000 over the coming months that will lead to the mother of all bear market rallies taking it back over 5000 in the first half of 2010 before it then collapses and heads sub 1000

I would not assume higher gold prices correlate with falling stock markets if I were you - they have been correlating with sharply falling bank stock prices - this is not the same thing for all the reasons I give elsewhere in this thread. Be careful.

[Extradry Martini]

What do you think about the news that China is thinking of increasing its holdings from just over 1,000 tons to 5,000 as one of their finance ministers said recently?

It's not a story you can trade on - we don't know how or when this is going to happen. Having said this, it is the major technical risk to the trade nonetheless.

[tomwatkins]

It's not a story you can trade on - we don't know how or when this is going to happen. Having said this, it is the major technical risk to the trade nonetheless.

I would agree. It's a "recent" story but personally the Chinese make it up as they go along. One week it's gold, then a new reserve currency the next etc. Sometimes I just think it's political posturing to frighten the Yanks in to thinking they may not turn up at the next Treasury Auction. I once remember some Malaysian geezer saying "remember, the only thing straight about the Chinese is their hair". Can I say that on this board?

[Number79]

I do actually agree that this is a bear market rally in stocks (though I am long of them and intend to remain so for a while as long as it doesn't break down), but you have to understand what drives gold prices. It hasn't been the recession per se (as that is bad for gold prices), but the fact that at the margin people have been worried enough about banks to take their money out and put it into gold. Now, there are only two fundamental reasons for much higher gold prices: rising inflation expectations and rising expectations that the government will simply let the banks fail. In order for the first of those to happen, we need an economic recovery such that demand meets supply (we are a long way from that right now, as you point out) and it seems to me it is very unlikely now that the banks will be allowed to fail. So there is no fundamental reason to buy gold any more. There is a possibility that China will start buying more at higher prices than this, but why should they and why do it now? If they do it in 2 years time, gold could be at 500 by then and they merely drive it up to 650, so that's certainly not a reason to buy gold now...

we are not expecting normal inflation but in bailing out the banks, at any cost, the government will cause sterling to depreciate significantly. That will then cause inflation in real terms to the average person as all food, fuel, goods etc are imported at a far higher sterling price. Not good for investment but surely this still gives an arguement for holding gold. It protects from imported inflation due to the government murdering sterling to keep the cogs moving, and still the banks may not be lending....

[whojamaflip]

My goodness, what a load of made-up, arbitrary, nonsense.... I took you seriously for a second there. More evidence that the forum goes loony after 5pm on a Friday!

However, it's not completely in vain - I guess that if these are the arguments against my position, I should be raising my confidence level in it.

Oh, and by the way I very much doubt I will be runnning my position to expiry - it is (rather obviously) a way of levering in to other ways of expressing it if the rough direction is right - but it does have to have meet the stand alone risk/reward threshold at inception. Also, the band is not $40 it is $69, but never mind...

Have a good weekend everyone!

14,000 rupees per 10gramms is an important level for the indian market. (thats $880 according to xe.com)

[okaycuckoo]

and - do pay attention - what has been happening is actually deflationary, not inflationary...

Aha! You've been pretending you're OO7, when your real identity is ... Q.

[Stay Beautiful]

I some gold as a position against sterling. I belive that QE will continue as the Govt will keep struggling on in an atempt to re inflate our economy and keep the banks bobbing along. At some point there will be a tipping action and we will be off with high inflation and IR's to match. Sterling takes another dive and gold will hold a better value than sterling. Of course gold should never be used as an investment and should only be used as a store of wealth.

[Wol]

EDM,

Much may depend on the "stress" tests, but I think there's sufficient reason to believe they're going to be fudged, the only question being How much.

Right now, the answer seems to be "by more and more each week".

That would make me wary of your bet.

[Avon]

All sounds very scientific and logical. How do you work out your confidence ratio? Your calculations all seem to depend on this.

Good question. In the case of this particular trade, the confidence ratio is the subjective part. It is not particularly strong here and it is a rough assessment given the arguments I put forward above. In essence, I think that it is more likely to go down than up, but if I am wrong and it does go, it could go up by a lot. The good thing about structuring the trade this way is that I only lose a certain amount however far Gold rises in prices, but I get a good payout if I am right. However, it is really the payout ratio which makes this trade viable - even if my confidence ratio was 1:1 (i.e. evens), it would still meet (just) my risk reward threshold.

There are times though where the payout ratio is so high that I am forced to put on a trade even though I don't think it will make money. What is important is the relative odds - your assessment of the probability versus the probability implied by the market pricing over the time horizon in whcih you are trading. For example, at the beginning of 2005, the Fed had started raising interest rates by 25 basis points at each meeting. Given the amount of personal debt in the US and the still lingering hangover from the tech crash, no one thought that the Fed would take rates very far. As a result, the market priced in around 2 more rate hikes to take Fed funds 50bp higher. The options market (in 3 month eurodollar - interest rate - contracts) was pricing 25-1 against the Fed raising rates by 25bp at every meeting until September of that year and 50-1 against them doing it in December. My confidence ratio was about 1:4 in September (i.e. I believed it 4 times probable that this would not happen than it would happen) and 1:8 in December, but when I compared this to the market probability of 25-1 and 50:1, I knew I had to put on the trade - despite the fact that I didn't think it would pay out. As it happened, the trade did pay out* as did the December and the March and June 06 bets I also put on (my September 06 didn't pay out). OK, I have chosen as an example trades that have paid out, but there have been more with low confidence ratios which have not, but you see my point here...

Interesting stuff. I have a modest position in physical gold, but a much more than modest interest in philosophy of social science. It seems to me that, although a fair effort at answering the question, this falls short a bit. First, the poster wasn't really asking for an explanation of value betting per se, which is what you give. If I think (eg have a justified belief) that John Higgins will win the world snooker final one in every three times it is held and I'm offered 6/1 on him winning outright, then as long as I'm not extreme risk averse, and have access to the funds, I'd be silly not to bet despite the fact I don't think Ladbrokes will pay out (I assume the italicised phrase means 'will more often than not, not pay out.' Second, what he was really after I suspect was an explanation of how you generate your subjective odds in the first place from apparently objective arguments about the relevant financial factors. But it seems that there is no way of making this conversion without some intuitive conversion of the separate factors (fiat currency breakdown, bank health, China, perennial lust for gold amongst bears) into a common framework and then after that using the result to generate the final probabilities that determine whether a bet is of value or not. Probably, the only answer to the question is 'I use my intuition, and some modelling for fun, but unlike the gold bugs I'm not emotionally involved in the process beyond making a profit...' It's the last point which is crucial, which interesting raises the point that we should maybe place more faith in the individual's method of reasoning (not his track record - argghh!) rather than the quality of the specific arguments he gives. I wonder also, on a different track, whether there any research on whether emotionally biased punters make significantly worse decisions than unemotional punters? After all, all these derivative traders seemed to have brought the world financial system to its knees based on 'objective, emotionally unbiased' analyses and bets? Just some thoughts of a total amateur investor....

[whojamaflip]

However, it's not completely in vain - I guess that if these are the arguments against my position, I should be raising my confidence level in it.

http://in.reuters.com/article/domesticNews...315157820090503

"Around 500 tonnes of scrap gold entered the Middle East in the first quarter compared with around 300 tonnes for whole of last year said Jeffrey Rhodes, the chief executive officer of INTL Commodities DMCC, an independent financial services firm based in Dubai."

btw - 500 tonnes per quarter is around the same as the rate it comes out of the ground.

i.e. demand is twice sustainable supply & gold is still over $900/oz

[Errol]

I actually think the price is going down as well (probably). But I would advise caution. Gold has the potential to explode upwards $100 in a single day (and will do in the years to come).

We could quite easily see $1000+ within a week. Similarly we could quite easily see sub $800 within a week. Gold is an extremely volatile trade and not for the inexperienced/feint of heart.

Generally I would advise people not to trade it at all.

[Errol]

And on the topic of my post above ... a warning -

BIG MONEY MOVING INTO COMEX GOLD & SILVER CALL OPTIONS

By Adrian Douglas

In November 2005 when gold was trading about $450 I predicted the mega-move in gold up to $720/oz by noticing a very large build-up of call options in the HUI component shares.

In August 2007 I identified a massive Gold call option build-up in the COMEX DEC 2007 contract and predicted a big gold move. Gold was trading at $660/oz at the time and ran up to over $1000/oz by March 2008.

In July of 2008 I noticed a similar build-up in the COMEX December Call options indicating a major upward move in gold before the end of 2008. Considering what transpired in the financial markets from July to December 2008, after I made this prediction, it made perfect sense. We now know, however, that two large banks, probably JPMorgan and HSBC, sold a massive amount of futures short in July 2008 equivalent to 10% of global gold production and changed the intuitive direction of the gold market into a counter-intuitive one. As a result the CFTC was obliged to take note and commenced an investigation into both the silver and gold markets on the COMEX for manipulation. So I think a rain-check is deserved on the 2008 market call until the CFTC officially declares the manipulation or the market blows up (I think the latter will happen before the former!)

It just recently came to my attention from two different confidential sources that JPMorgan and Goldman Sachs have been buying large amounts of Calls in gold and silver. This made me put on my gumshoes and take a serious poke around the COMEX option open interest once again.

Figure 1 shows the cumulative Open Interest across all strike prices for the COMEX Gold Call positions and the Put positions for the JUN 09 options.

http://www.lemetropolecafe.com/Pfv1.cfm?pf...drian%20Douglas

Edited May 4, 2009 by Errol

[whojamaflip]

history has a habit of repeating itself..

question is, are 1975.. or 1980?

[General Congreve]

http://www.lemetropolecafe.com/Pfv1.cfm?pf...drian%20Douglas

Back from Bank Holiday weekend fun, better than spending my time debating gold price movement with EDM, no offence

Anyway, Errol, nice link, liking it!

[Number79]

http://in.reuters.com/article/domesticNews...315157820090503

"Around 500 tonnes of scrap gold entered the Middle East in the first quarter compared with around 300 tonnes for whole of last year said Jeffrey Rhodes, the chief executive officer of INTL Commodities DMCC, an independent financial services firm based in Dubai."

btw - 500 tonnes per quarter is around the same as the rate it comes out of the ground.

i.e. demand is twice sustainable supply & gold is still over $900/oz

most of that scrap came from india where gold hit new highs in indian rupee, they will be buyiing again at the right price though as gold is money there.