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Monday, December 8, 2014

Attention Traders: The Value Of Cash Is Not Absolute

Over the last few years, as the price of Gold declined, several professional traders and financial commentators have taken it upon themselves to unleash their wisdom about the metal being "just a trade". They've decided that everyone should see the financial world through their narrow lens and have used it's declining price as "proof" you should always have a stop and be prepared to exit your position.

The way I've framed the above might suggest I have a problem with their view. In fact I don't, it's one way of looking at the assets in your investment portfolio. However, to take their view you also have to give thought to ALL positions and that includes cash, which should also be considered a trade as it's value can change.

Earlier this year I wrote about Ritholtz's position on gold bugs ('Barry Ritholtz Mischaracterizes Gold Bugs'), one of the rules in his article was:
The Danger of One-Way Trades: What would make you reverse your biggest present holding? What facts or situations would force you to change your views and sell? If your answer to that question is, “Nothing,” you have a huge, devastating flaw in your approach to investing.
I hear traders talking day in and out about 'going back to cash' or 'sitting in cash' after exiting all positions, but if a trader was to think about what they are doing logically, as they would any other position, they are simply moving from one asset which fluctuates in value to another.

What facts or situations would force a trader to consider a position in cash being unsafe? Answer that and you might be on the path to understanding the reasons that some investors choose to hold physical Gold.

A reader of my Ritholtz article commented: "Ritholtz essentially supports his analysis by treating fiat currencies as a bedrock, i.e. asset changes are all relative to this unchanging fiat value." I agreed: "Ritholtz claims to be ‘asset class agnostic’, but then measures the performance of other assets back to fiat which doesn’t have static value."

Newsflash: Cash / fiat currency is not a neutral position.

There is no asset which remains absolute in it's price or value relative to everything else (and yes that includes cash or Gold).

I tried to explain this briefly to one trader (Mark Dow) who regularly has a crack at gold bugs on Twitter, to my amusement he suggested that you don't have to hedge against fiat currency because it's "legal tender".

Click Image to Enlarge
How could anyone think that a currency being legal tender protects the holder from changes in it's value?

Sure it's a unit of account and may remain a constant relative to some assets, for example a $10,000 loan will always require $10,000 in cash (+ interest) in order to repay it, but the value of currencies can be affected in various ways, sometimes to devastating effect.

So how does one hedge or insure themselves against fiat currency and the financial system?

This question reminds me of a discussion that took place in the comments on Cullen Roche's site (comments since disabled, but they were here) a couple of months back when he suggested that those wishing to hedge against the financial system should take a short position on the finance sector. 

Imagine taking out insurance against your house burning down and then leaving the only paper work you could use to make a claim inside the very same house.

That is basically what Cullen proposed. Some of the sensible responses below his suggestion included:
“Gold like cash is a unique hedge because unlike options, or bonds or financial hedges it has infinite duration.”

“I have an allocation to gold and silver because its the only way that I can be 100% sure that my “insurance” isn’t someone else’s liability.”
Precious metals are unique in the sense that they are one of few assets which can be held physically outside of the financial system & can't be diluted in the same way as fiat currencies.

Some traders might argue that significant changes in the value of cash occur so infrequently that it's not worth worrying about (tell that to someone living in Russia, Japan, Cyprus, North Korea, Venezuela), but that's exactly the mindset that some of these traders criticise others for, that is, having a baked on view that holding an asset poses no risk. 

Holding a 100% position in any asset is risky, whether that's cash, Gold, Silver, property or anything else. Diversify or be prepared to wear the consequences if the value of that position moves against you.


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Monday, December 1, 2014

Gold & Silver On Sale - Cyber Monday Deals

Looks like the result (strong rejection) from the Swiss Gold Initiative proposal is showing up in the Gold price this morning. I don't think the result is unexpected. As Bron Suchecki wrote last week, there were some conditions attached to the proposal which were not palatable. Down she goes (continued weakness expected while Gold remains below US$1180)...


For those wanting to try and catch a falling knife and take advantage of some low dealer premiums, there are some great deals out for Australian precious metals buyers with dealers listing some 'Cyber Monday' bargains... you will need to be quick to make a decision on these as most deals will be limited (in quantity) and will likely be pulled end of day if not sold out sooner.

Site sponsor Bullion Money has some great deals posted already, including:

1oz 2015 Kookaburra Silver Coins for less than $5 over spot (premium this low usually reserved for large orders, but can buy as few as you like for this price).


There are some 1/4oz Gold coins on special too, keep an eye on the clearance specials page for all items on special and any others that may be posted throughout the day.

Other dealers who are offering Cyber Monday deals include Gold Stackers (deals live now) & Perth Bullion (deals yet to be posted).

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Saturday, November 15, 2014

Soros Short S&P 500 & Emerging Markets (Puts)

As previously noted on this site (Soros $2.2 Billion Bet On SPY Puts), Soros Fund Management LLC holds a large position in SPY (SPDR S&P 500 ETF Trust) puts. The position was reduced over Q3 (ending 30/09/2014), however the notional value of the position remained substantial, both in dollar terms and as a percentage of the fund.

Click Chart To Enlarge

Following the large decline and then bounce to all time nominal highs in the S&P 500 since the reporting period ended, I would be surprised if the position hasn't been further reduced in Q4, but we won't know for another 3 months.


Another interesting change includes a large short position on emerging markets (EEM put), with a notional value of $935M. It was the second largest position in the fund (by notional value, view all reported positions on Whale Wisdom) and over 2.5x larger than in Q4 2011 when Business Insider noted EEM puts were the largest position held. The iShares MSCI Emerging Markets ETF saw a large price decline during Q3.


During Q2 the Soros Fund increased positions in Gold miner ETFs (such as GDX & GDXJ), which some commentators saw as a bullish omen for this sector, however Q3 shows a reversal with the positions reduced and in the case of GDX calls the position was exited completely.

Of course as I've said before these positions don't tell us what strategy any single position might be a part of and a lot can change in six weeks (positions will have changed again since the reporting period ended).


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Sunday, November 2, 2014

Failed Triple Bottom in Gold

On Friday Gold broke below US$1180, an important price level from a chart perspective, which indicates a failed triple bottom.


Lower prices seem likely in the short term. The breakdown looks eerily similar to the one we saw in 2013 before a waterfall decline when the price broke below $1500 (as I covered on the blog here).


Not to say that I think another $300 decline in price is likely, but those holding long should prepare themselves for the potential of further downside. Australian readers might find the blow cushioned by a lower Australian Dollar.

A set of charts that is worth a look is this recent publication from Peter Brandt where he writes, "Gold is the ultimate charting market. Gold rarely begins a major trend without first ringing a bell and waiving a flag announcing its intentions."


Even if you aren't a trader you'll likely find the repeating patters quite interesting. I've rarely seen daily charts from some of the eras shown and the 1970s cyclical bear market in Gold shows some similar patterns to those we are seeing today.


It's my contention that we are only experiencing a cyclical bear market in Gold today, just as we saw in the mid 1970s pictured above.

Many have suggested that government deficits and QE has already and will continue to materialise into directly higher Gold prices (via high levels of inflation), but I think that narrative has been debunked. The price of Gold has fallen sharply as some of the most aggressive QE programs took place.

As I see it Gold rose over late 2008 to late 2011 as a result of instability in the financial system, stock markets and the perception that the central banks had lost control. However, over several years of QE and as stock markets returned to rising steadily with only small corrections, complacency has set in. I wrote on this theme last year:

Gold Driven By Financial Instability, Not Inflation

Ben Hunt calls it a narrative of central banks omnipotence and believes it has reached a top (via The Ministry of Markets):

"I’m calling a top in the Narrative of Central Bank Omnipotence because it has, in fact, reached its asymptotic limit of influence and belief."

But while the public may believe in the omnipotence of central banks, central banks rely on the omnipotence of Gold (as net buyers for the last half a decade).

In my opinion it will take a shift in perceptions to end this narrative that the central banks have control over the markets, to stop the Gold price decline and see the secular bull market resume.

The conditions that resulted in the Global Financial Crisis are far from over with western nations still saddled with large amounts of debt relative to their size of their economies, a situation that I don't see ending without incident.

The event or series of events that take place to drive that change in the market is anyone's guess. It may be realisation that the United States will be unable to normalise interest rates without sending the economy back into recession, it might be a shock from China or something less obvious at the current time (a black swan).

Short term traders with long positions have probably been stopped out in the Friday decline, but those with a long term view who are holding Gold as insurance or hedge against financial calamity should look past the short term chart patterns and be confident in the long term prospects of Gold.


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Tuesday, October 14, 2014

Property Narratives Using Data & Wording Obfuscation

In a recent article on Property Observer (Lies, damned lies and housing statistics) commentator Arek Drozda discusses Australian property statistics. He tells the reader many commentators write stories around property numbers that can't be relied on.
 
Drozda claims that "data does not lie". However, data is just a collection of facts and statistics for reference or analysis and, as Janine Skorsky of House of Cards says, "There is no arrangement of facts that is purely objective."
 
----------------
 
The above is my introduction to an article I wrote for publication on Property Observer in response to some recent observations by commentator Arek Drozda. You can read it in full here: Subjectivity, damned subjectivity and housing statistics.


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