Get a safe, hold cash, and wait for the buying opportunity.

[c1ue]

Re: Get a safe, hold cash, and wait for the buying opportunity.

Moving stop to $68.2. Looking to see if the gold bugs are right: a breakout past $700 will ride to $730 or even $750.

Moving stop to $68.9.

[c1ue]

Re: Get a safe, hold cash, and wait for the buying opportunity.

Moving stop to $68.9.

Moving stop to $70.1

Significant possibility of breakout coming, but strategically I'm still seeing GLD as short term.

[raja]

Re: Get a safe, hold cash, and wait for the buying opportunity.

Moving stop to $70.1

Significant possibility of breakout coming, but strategically I'm still seeing GLD as short term.

C1ue,

Could you share your thinking on why gold is only short term up?

I read some things you had to say in a previous post, and wondering where you're at now. I was thinking that gold would go down with the stock market, but it's not following that pattern now. Thus, my fear/hope is that GLD is headed up, never to look back . . . for a few years, anyway.

[c1ue]

Re: Get a safe, hold cash, and wait for the buying opportunity.

Could you share your thinking on why gold is only short term up?

I read some things you had to say in a previous post, and wondering where you're at now. I was thinking that gold would go down with the stock market, but it's not following that pattern now. Thus, my fear/hope is that GLD is headed up, never to look back . . . for a few years, anyway.

I've been trading gold based on this thesis:

That the majority of investors out there did not either see the housing decline leading into a recession, nor foresaw the ensuing rate cuts by the Fed leading to dollar depreciation and increased inflation, nor finally looked towards gold as a viable counter-investment against the 2 above occurrences.

I used the following as my litmus tests:

1) my mother - has gold as jewelry (and had 1000 oz of silver from the '80s), thought it was only for old people like my grandmother.

2) my Salomon Smith Barney adviser - I'm testing out their services; when I laid out my economic view, including gold as a possible hedge, he looked at me like I had 2.5 heads

3) my Morgan Stanley adviser - ditto on the testing, also ditto on the look

Salomon guy is an ex floor trader, been in industry for 20 years (but post 1981 ), while Morgan dude is the prototypical young 30's MBA - smart but completely not a student of history nor understanding of own inexperience.

This told me that there was a large population out there uneducated as to the view held by iTulip, and also uneducated as to the possibility of gold as a hedge.

Thus I have been watching GLD for some time for an entry point.

My belief is that as housing worsens and as people start to understand the ramifications of the Fed cutting interest rates, the investment demand for GLD and gold will increase.

However, at the same time, all of the following issues are on economic time, not trading time: Fed interest rate cuts to significant low interest level, leading to dollar depreciation, leading to increased inflation, poor economy plus liquidity reduction leading to overall lower market valuations including the much touted 'defensive' stocks such as food, and gold showing its fundamentally different nature vs. 'defensive' stocks and bonds.

Thus my present trade is a pure play on gold investment demand.

Once many of these FNGs come in, they will then discover the bad side of gold: no interest, carry charges if physical, gold generally doesn't shoot up like an internet stock, etc etc. At that time investment demand will decrease until (or possibly unless) we start seeing tangible signs of the above.

There is a possibility of gold increasing creating a synergistic spiral - that's why I still have it but have deployed stops.

I actually shouldn't be posting this - it is self destructive normally to expose a sentiment play.

But I think the forces at work are beyond redirection now. Don't spread this around ;)

[Guest]

Re: Get a safe, hold cash, and wait for the buying opportunity.

C1ue -

You wrote: << he looked at me like I had 2.5 heads >>

OK, enough is enough. iTulip readers have a right to know. How many heads do you really have?

[c1ue]

Re: Get a safe, hold cash, and wait for the buying opportunity.

Well, it depends on your definition of 'heads' :eek:

[c1ue]

Re: Get a safe, hold cash, and wait for the buying opportunity.

Moving stop to $70.1

Significant possibility of breakout coming, but strategically I'm still seeing GLD as short term.

Stopped out at $70.1.

+8.8% with a 28 day holding period.

Will consider going back in if 70 holds past 9/18

[Andreuccio]

Re: Get a safe, hold cash, and wait for the buying opportunity.

8.8% over 1 month. Sweet! May all your trades (and mine) be so profitable!

[Guest]

Re: Get a safe, hold cash, and wait for the buying opportunity.

Andreuccio and C1ue -

An update for the "hard core traders" - For your interest.

Lukester


________________

GETTING TECHNICAL By MICHAEL KAHN

A SECRET TIME BOMB MADE OF GOLD?

THE VOLATILITY SEEN THIS QUARTER IN the stock and credit markets may be new to younger investors. But there is something lurking out there that can make things really dicey.

A little-known fountain of free money called the "gold carry trade" is in danger of drying up. And if it does, then markets from gold to bonds and even stocks can be in for a wild ride.

Before even explaining what the gold carry trade entails, let me first say that its demise has been forecast for nearly a decade. In researching this topic, I found articles as far back as 1998 looking for an explosion in gold prices and commensurate damage to other markets, if not the economy. In other words, this is a story that is as old as Methuselah.

But with a sinking dollar, soaring commodities, and several diverse technical conditions on the charts, the dynamics are coming together to make the end of the gold carry trade a lot closer to reality than ever before.

The gold carry trade is similar to the yen carry trade, which has been a hot topic in the markets this year. Basically, money is borrowed from one source at a low interest rate and invested elsewhere at a higher rate. As long as relevant exchange rates and asset prices remain stable, a profit is made with little effort.

Central banks are sitting on huge supplies of gold that earn them no interest and cost them money just to store securely. To earn a little revenue on these static assets, they loan their gold to banks, called buillon banks, at a ridiculously low interest rate on the order of 1%.

The banks turn around and sell the gold in the market, typically in the London bullion market, and invest the proceeds in a higher-paying asset, such as long-term Treasury bonds. If bonds pay 4.6% then the banks earn an easy 3.6%.

The problem is that if the gold price starts to rise, profits can be wiped out or turned to losses. And in today's market, a falling dollar not only boosts gold prices but it also makes Treasury bonds less attractive to foreign investors. That reduces demand and weakens prices to create a potential double-edged sword for carry traders.

The banks, of course, realize this and hedge their gold sales by buying gold futures. According to Kevin Schweitzer, senior vice president with Hudson Securities, a firm that makes markets in gold stocks, the hedge is not perfect. If central banks call in their gold loans, the banks cannot wait for contract expiration to take delivery on the gold they purchased via their futures contracts. They have to pay back their loans right away and if gold prices are stable, there is no problem for the banks going into the physical market to buy back their gold.

However, if gold starts to rise quickly, the added demand from the banks to buy gold can exacerbate the rally causing what amounts to a mad dash for the metal. The market will respond with steeply higher prices, and Schweitzer sees this pushing gold to $850 by the end of the year.

All of this is fundamental in nature so let's examine the technicals a bit more. As the chart shows, gold peaked in May 2006 in what some labeled a speculative bubble. However, rather than falling quickly as burst bubbles portend, the market moved sideways for the next 15 months (see Chart 1).

Chart 1

Last month, gold broke out from that range to resume its bull market, moving quickly from 670 to 721 in just eight trading days. A 7.6% move in such a short period is a wake-up call for the carry traders.

Schweitzer also points out that open interest in gold futures, which measures the current size of bets made by futures traders, is 34% lower than it was last year at the presumed speculative price peak. In other words, the speculation present today is lower than it was the last time prices went up like they are now, and Schweitzer thinks that this gives the market a lot of room to the upside. Traders who buy momentum markets -- think Nasdaq in 1999 -- have not yet piled on.

Seasonally, gold is also entering one of the stronger parts of the year. Commercial players in the gold industry, the so-called smart money, are still buying and otherwise acting as if they expect prices to continue to rise (see Getting Technical, "Gold Stocks Are Precious Again," Sept. 10). Put it all together and the technicals support higher prices, short-term corrections excepted, and that will continue to pressure the gold carry trade.

What is the price that breaks the bank, so to speak? It is hard to say. But with so many factors conspiring to keep the rally going, it does look as if the carry trade is finally about to unwind. Banks that hold big short positions in gold are going to be very vulnerable. Investors sitting on a stash of Krugerrands or Maple Leafs will be a lot happier.

[c1ue]

Re: Get a safe, hold cash, and wait for the buying opportunity.

Lukester,

Thanks for the article.

I would find it more credible if there were some relative volume numbers.

Just because something is occurring doesn't mean it will move the markets - unless the numbers are huge a la yen carry.

I also don't know if I agree with this statement:

Commercial players in the gold industry, the so-called smart money, are still buying and otherwise acting as if they expect prices to continue to rise (see Getting Technical, "Gold Stocks Are Precious Again," Sept. 10). Put it all together and the technicals support higher prices, short-term corrections excepted, and that will continue to pressure the gold carry trade.

There are definitely a large number of call contracts outstanding toward the latter part of this year, but it is not clear to me if this is commercial or speculative.

In any case, I am not trading based on volumes - but on sentiment. As such it is not worth my risk evaluation to hold in case breakout occurs.

Besides which I believe the Fed will dissatisfy the market while simultaneously doing the wrong (iTulip opinion) thing and thus also hurt the short term gold momentum.

[Guest]

Re: Get a safe, hold cash, and wait for the buying opportunity.

Clue -

Definition of an ultra-short term trader - not willing to accept even a 5% drawdown on any position - with a view to any larger upside ahead.

I held a portfolio of about 60K which I let several times get drawn down by 30% - 40%. It doubled in 18 months, but several times over I had some real agonizing moments understanding that I had to leave it alone.

Then I started reading iTulip, right about the same time as this summer's seriously squirrely markets came along, and I sold everything.

My point is, there are more than a few portfolios, and times and places in the market when the ONLY really big money you're going to see is if you are prepared to sit within those positions through multiple such gut-wrenching drawdowns. In commodity stocks, as you must know, 20% down is nothing. You do those downturns like clockwork twice a year.

Rick Bishop follows this idea (I think). I followed it too. When I did a chicken-little and bailed out of all my stocks a few weeks ago, after having talked about the virtues of holding through the nasty market moments, Rick got so pissed at my hypocrisy (not following what I openly advocated) he stopped talking to me. That event really was my loss, as Ricks a cool guy and I really felt the sting of his disdain.

Commodities, in all their aspects, are one of these "hold" markets in this decade, unless you want to bet that Jim Rogers is all wet.

[c1ue]

Re: Get a safe, hold cash, and wait for the buying opportunity.

Lukester,

You are entitled to your view.

Mine is that there may be a long term opportunity for gold, but it is not by any means a slam dunk.

Gold is not Citigroup in 1991, nor JP Morgan and Tyco in 2002, nor IBM & Merck in 1994.

Even the short term performance is significantly hostage to events completely out of analysis.

Thus when I term a specific investment a trading opportunity as I specifically named the GLD buy, I trade.

I have other investments which I have held for 50% of my lifetime.

However, we are in a time which has led been to look to unload even the long timers.

In my book, all that matters is what I think will happen and how I protect/profit from it.

After all, it is not the surprise which kills you, it is your failure to react to it.

I've ridden waves a number of times and the only lesson I've learned is to not overstay your welcome by assuming the market will do the right thing.

[Guest]

Re: Get a safe, hold cash, and wait for the buying opportunity.

C1ue -

Nowhere did I suggest there is only one way to skin a cat. (with all respects to cats, many of whom are strays, fend for themselves, and deserve better than this metaphor)

[Finster]

Re: Get a safe, hold cash, and wait for the buying opportunity.

Another point worth considering is that the "gold carry" only works so long as there are higher-yielding assets out there to carry. The lower central banks push rates, the less profitable the carry.

Moreover, we already have stocks yielding a pittance of their former selves. The only way to get any returns from them any more is for their prices to continue to rise. Low yields are therefore a destabilizing force; either stock prices keep going up or there is little reason to own them, and they get sold.

[Guest]

Re: Get a safe, hold cash, and wait for the buying opportunity.

Finster -

I have no clue where to post this, so I'm dumping it here. If anyone can make heads or tails of it profitably for us all then maybe they can re-post it over into a thread in Commodities where anyone else here who 'really gets this' can post their own understanding and synopsis for the rest of us.

________________

Here's some more parsing of the precious metals 'carry trade' and more particularly a clarification regarding the difference between the 'lease rate' and the 'lease rate basis' as two entirely separate components which often get confused as indicators in the PM bullion markets.

This text is from the SILVERAXIS website, edited and authored by TOM SZABO, a collaborator with Antal Fekete who is writing recently about the significance of the 'basis' as a factor in changes from contango to eventual backwardation in the precious metals.

Tom Szabo seems pretty smart (to me, anyway - maybe someone can demonstrate otherwise) in his analysis of the metals.

I think Bart in particular, and anyone else here with some futures background who monitor futures markets with sufficient experience may be able to skim through and if there is any merit to the arguments, 'deconstruct' some of the issues which Tom Szabo (and Antal Fekete) report on.

Apparently Szabo (and Antal Fekete) are in an ongoing wrangle with Mish Shedlock at this time regarding the nature of the large short positions in Gold and Silver. Antal Fekete is up to speed on the subject of gold and silver leasing, as even a cursory reading of his overviews on leasing suggest. Mish on the other hand is a generalist. My bet is that Prof. Fekete's analysis, which Tom Szabo steers by also, is the correct one, and Mish is wrong. Others may decide otherwise.

This is the basic thesis developed by Antal Fekete, and followed as a methodology on the Silveraxis website by Tom Szabo - on the nature of basis as the sole determinant of when gold and silver markets are ready to go ballistic.(Note: interested readers should read the following URL only AFTER reading the excerpts below in this post) :

http://www.silveraxis.com/explain_basis.html


Right or wrong, this is highly topical material for the present markets. I've only managed to get a serious headache trying to wrap my wits around Tom Szabo's points on these issues, and only have a shaky grasp of what he's on about.

But I sense there is some real meat in the things he and Fekete are discussing. It's my hope that someone here with plenty of expertise in futures can decipher the ongoing debate between Szabo and Fekete on the one hand, and Mish Shedlock on the other.

Hidden away in this debate is some significant insight we can all employ to really understand when 'the big one' may occur in Gold and Silver prices. If iTulip's most qualified people hash this over and pull out the simple rule to watch, many of us can potentially make some quite profitable returns from insights gained within that discussion. :confused:

I'll just paraphrase one point within their debate - SZABO points out that when a significant credit crisis really kicks in systemically, you will need to see the lease rates on Gold and Silver DROP, not RISE. Food enough for thought?

Here's an excerpt - and the also the URL of the website where I've retrieved a lot of this discussion from :

http://www.silveraxis.com/


TOM SZABO - (Silveraxis)

SEPTEMBER 14 2007 11:30AM -

I wanted to make a very important observation today about something that I have ignored and put on the back burner for far too long. This observation is about the "lease rates" for silver that I show in my indicators above, which is in the same format as published by the London Bullion Market Association, Kitco.com, BullionDesk.com and others for silver, gold, platinum, etc.

Many people, including some insider professionals, have assumed that the lease rates as typically shown, for example as 0.37% for 12-month silver today, represent the actual nominal rate of interest charged by metal lessor to lessee over the specified lease term. This, in fact, is not true. The published lease rate actually represents the percentage DISCOUNT from LIBOR, the London Interbank Offer Rate charged by British banks on short-term loans to each other.

As a result, when the published "lease rate" is climbing, it simply means that the DISCOUNT from LIBOR is GROWING. That is, the lessor of metal is actually getting less and less by leasing than he or she would get by selling the metal and loaning out the cash. Said differently, a rising "lease rate" means that metal leasing is becoming LESS profitable compared to lending cash.

One can think of this in the same way as the price BASIS between the cash and futures markets: the published lease rate, as long as it is positive, means that market interest rates exceed metal lease rates. Just as with the basis between cash and futures markets, when the interest rate exceeds the lease rate, this typically means that the market is in contango. But what about backwardation?

Well, in terms of lease rates, that would actually mean that the published lease rates are turning NEGATIVE! This is because the actual lease rate on metals in a backwardation scenario would more than likely exceed the interest rate (LIBOR), but not always as was the case during the PM spike in early 2006. Looked at another way, if a lease rate below LIBOR results in a positive published rate, then a lease rate above LIBOR would result in a negative published rate. Very important if you are looking at lease rates for indications of a monetary crisis!!!

I must say that at times I have been completely ignorant of the fact that this was not commonly understood by most people, including many professionals, and I myself have made a major mistake by not factoring this "secret" into the equation on a number of occasions, including my comments on silver lease rates on August 6.

In reading those comments over, I can see how they might be extremely confusing as alleged by more than one reader. I had referred to both the published lease rate (being the discount from LIBOR) and the actual lease rate in the same breath without really separately identifying the two, which is actually a major mistake that makes much of what I say self-contradictory.

I hereby apologize for this mistake and going forward, I will not refer to the published "lease rate" (representing the discount from LIBOR) as the "lease rate" anymore, but rather as the "lease rate basis". The Lease Rate Basis is the difference between the actual metal lease rate and market interest rates as measured by LIBOR.

In the future, I will only refer to the lease rate when I mean the actual lease rate, not the difference from market interest rates. As an example, the lease rate basis in silver for 12 months is 0.37% today whereas the lease rate is 4.75%. Meanwhile, the 12 month LIBOR in U.S. Dollars is 5.13%. I hope others will consider changing this convention as well, because it is really a bearish way of looking at PMs, one that I too have been guilty of propagating.

Don't worry if you don't see what I'm talking about, I will have more to say on it in the very near future, starting with a counter-rebuttal to Mike Shedlock's off-track arguments belittling Prof. Fekete's latest communiqué on the gold standard and mine hedging. In fact, it was my attempt to understand how Mr. Shedlock could be so far off base that I realized the key was the almost-universal misunderstanding and confusion over the published "lease rates". Provocatively (and perhaps unsurprisingly), Barrick has no misunderstanding and knows exactly the risks that it faces, and this is the crux of Prof. Fekete's searing criticism. More on this later.

For now, the most important thing for you to take away from this mess is that the lease rates as published by Kitco, The Bullion Desk and others should be turning NEGATIVE, not rising into positive territory, when a financial crisis unfolds with sufficient substance that gold and silver are thrust unto the monetary stage. This knowledge is especially important for gold and silver investors to have because most people will be looking for the exact opposite. In closing, I would like to thank Prof. Fekete for making me think long and hard enough about this issue to see its relevance and importance.

___________


And here's just a tiny excerpt of Prof. Antal Fekete's analysis on leasing, which gives a hint of the robustness of his method :

Upstream and downstream hedging

Hedging is most efficient if it is bilateral. As it has been practiced in gold mining, hedging is unilateral. It involves forward sales by way of downstream, to the exclusion of the forward purchases by way of upstream hedging. It is a caricature of hedging. It pretends to overcome the fluctuation of the gold price as it affects the output of new gold. I say ’caricature’ because it is counter-productive.

Rather than allowing the producer to sell high while preserving the value of his unmined reserves, it forces him to sell low, and sell it fast, as the message is that the price is going to fall, and any delay in selling will involve losses.

Yet, if done properly, either type of hedge should contribute to profitability as well as husbandry. In combination they are a legitimate form of arbitrage, provided that the hedges are carried in the balance sheet, and profits (losses) are reported in the income statement.

Hedges carried offbalance-sheet are not legitimate as they conceal a liability with the result that the income statement is falsified. Shareholders and creditors are misled. Directors and managers lock themselves into a fools’ paradise. Especially dangerous are downstream hedges carried off-balance-sheet, for the reason that the short leg (forward sale) represents an unlimited liability.

By contrast the long leg of the upstream hedge (forward purchase) represents but a limited liability. The difference is due to the fact that while the price of a commodity can never fall below zero, there is no identifiable limit above which it may not rise. Another way of expressing it is to say that the downstream hedge is subject to a squeeze and possibly to a corner. By contrast, there is no way to squeeze or to corner a producer with an upstream hedge.