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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