Managed Money Positions
Historical Gold Price and Managed Money Positions
Latest Update
Aug 22, 2011
Gold’s recent run has simultaneously surprised us as well as caused us great concern. While we have been a long-time proponent of precious metals as being in a secular bull market, gold’s recent infallibility is not a good sign for its long-term health. In all bull markets, there comes a time when the asset is so coveted that buyers will pay almost any price for it, and the asset takes on a rocket-like trajectory. At this point, it can no longer be bought or sold with any conviction, as the money chasing it can push it up to no end, but the inevitable fall will also be severe. While gold may not be in such a dire situation just yet, it is getting perilously close to such a fate.
Trade Recommendation Real Finance Aug 22, 2011
Because of the heightened possibility of gold prices going truly parabolic and quickly exceeding the 2000 level, we recommend closing short positions on gold and going to a flat position. Once government policy and their implications become more clear, we will be able to enter an attractive risk/reward trade, but at this point the unknowns outweigh any possible risks.
An interesting trade idea for an aggressive trader could be to simultaneously buy the October 1700 put and the October 2100 call. Such a trade could be effected for about $24 per contract, and would be profitable if gold closed above 2124 or below 1676 on September 27th. This trade’s effectiveness is predicated on a large, sudden move in gold prices, which we think is more than likely. From this point, either gold will rally with ever-increasing strength, quite possibly surpassing the 2000 and 2100 levels, or it will correct sharply down to the moving averages, with the last-resort 150-day moving average of 1502 serving as critical support. The trade’s downside is limited to the premium paid, $2400 per contract, but upside is unlimited. As the current political and headline volatility in gold makes a short option position unattractive, this long volatility trade could be a good way to profit from more turbulence in the gold market, be it up or down.
July 25, 2011
All of the analysis is extremely bullish for gold. On one hand, if our worst prediction comes true, not only will the floodgates of liquidity eventually be opened, but the Fed will have lost all credibility. Investors will rush into gold as the last true currency because the central bankers’ ineptitude will be on full display. On the other hand, if there is little progress on the debt, inflation will continue to ramp up and real interest rates will remain negative. Either way forward seems highly bullish for gold.
In the past, a broad US dollar strengthening would have been bearish for gold, but we do not expect this to be the case going forward. Gold is now a true world currency hedge, as the same problems plaguing the US are the ones afflicting all developed economies. As investors continue to witness central banks’ manipulation of their currencies, gold will only become more and more valuable.
Trade Recommendation Real Finance July 25, 2011
Since gold is fairly extended, we recommend holding current exposure, with an eye towards increasing if gold were to fall to the 1550 level. Around 1625-1650 we may be inclined to take some profits as a trade, but having a large allocation to gold at all times going forward is essential.
Trade Recommendation Real Finance July 14, 2011
To be clear, this recommendation is made mostly from a defensive, cautionary standpoint, as we wish to protect profits, and minimize risk of loss. More aggressive traders could remain in silver. However, we think a good strategy is to reduce exposure at these levels, then if silver proves itself and breaks through the 40 barrier with conviction, to repurchase silver at those levels. If in case silver does in fact fall, we would be a buyer again at the 35 level.
Another strategy would be to hedge using options. A light hedge would be simply selling calls on long silver positions. A true hedge would be to sell calls, and then use that money to finance the purchase of put options. An example of this trade would be to sell the SLV Aug 41 call and buy the Aug 35 put. This trade would be done for a net debit of .10, and would insure that the lowest price an investor would have to sell SLV for would be 35 on or before August 19th. Similar trades can be executed via silver futures or the SLW; one simply has to locate an out of the money call option selling for the same as an out of the money put option. Selling the call option and buying the put option simultaneously places what is known as a “collar” around the position, limiting both the upside and downside. This is an effective strategy to use when volatility is high and the outlook is uncertain, but an investor wishes to retain the underlying position.
July 4, 2011
The recent $65/ounce price fall as of late looks to be caused by Managed Money long liquidation, coupled with disproportionate retail selling. The following charts show gold futures with volume, and then GLD with volume.
As can be seen, gold futures volume was slightly below average recently on the selloff, whereas GLD volume as above average. Especially given the light volume surrounding the holiday weekend, GLD’s increased volume is telling that retail investors are bailing out of gold much quicker than futures traders. As usual, we do not expect the short-term retail response to be correct, and we view the purchase of gold futures as ideal.
The following chart shows a daily price of gold over the last 5 years with the 150 day moving average.
As can be seen, gold has not dipped below the 150 day moving average since early 2009 in the depths of the financial crisis. With the 150 day moving average rising each day, the 1440-1450 area should be considered a hard floor for gold prices. If we see gold trade down to the 1400-1430 level, we would become more concerned over the long-term trend for prices. Risk-minded traders could use this level for a stop loss, although almost every gold trader will also have their stops in this area, so we could see a quick freefall down to the 1300-1350 range if in fact the 150 day moving average is violated. However, we view this scenario as highly unlikely.
Trade Recommendation Real Finance July 4, 2011
Trade Recommendation Real Finance June 26, 2011
Trade Recommendation Real Finance June 23, 2011
Trade Recommendation Real Finance June 16, 2011
We believe that a Greek default, in some shape or form, is inevitable, and this event will be highly bullish for the dollar and gold simultaneously. The dollar will rally against the euro as investors start to flee euro-denominated assets once it becomes clear that the ECB’s backstop is now removed not only for Greece but the entire Eurozone. At the same time, the capital fleeing the euro will also seek haven in gold, as confidence in paper currencies will take another large hit due to the ongoing mess… aggregate open interest has tailed off very slightly in the past couple weeks, indicating mild long liquidation. To get back to the highs of open interest back in November 2010, gold traders would need to add another 150k contracts. In such a scenario, gold prices would be well above all-time highs.
How to Trade Gold
We recommend purchasing gold futures at 1527 an ounce or better. We view this outright long position in gold as very attractive going forward due to ongoing political and currency uncertainty, and recommend this trade as a long-term, core holding of a portfolio.
Trade Recommendation Real Finance May 13, 2011
We recommend the purchase of gold futures in the 1485-1495 level. After selling off aggressively during the commodity meltdown on May 5th and hitting a low of $1462/ounce, gold has continued to sell off, but has reached a slightly higher bottom each time it has sold off. This indicates demand for gold is picking up when it falls, and that the downside is limited. We would view the downside of gold as being limited to the 50 day moving average at $1464.
The same trade can be effected by the purchase of GLD.
Trade Recommendation Real Finance May 5, 2011
We recommend purchasing gold futures. Gold has pulled back $100 an ounce in 3 days, and fundamentals for the metal remain extremely strong going forward. The recent pullback should have the effect of washing out weak long holders, and this consolidation will prove healthy to the gold market. Unless you think inflation has peaked, or that government debt problems will somehow be solved through a combination of extraordinary growth and unprecedented financial discipline, you should own gold.
Trade Recommendation Real Finance April 19, 2011
We continue to advocate long futures positions in gold. With gold breaking above key resistance at the 1440 level, the current rise in prices could be sustained for quite some time before undergoing another correction. Given how many times gold bumped up against the 1420-1440 level without successfully breaking through, its recent breakout could be the confirmation many traders were looking for to renew bullish bets.
For our simplest trade recommendation in quite some time, we would recommend purchasing the June gold futures contract at 1486, or the GLD at 145.51. If gold drops, we would advocate aggressively adding to long positions.
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