While you were sleeping…
PM suffered a Monday-morning dawn assault this AM in asia; silver dropped to 23.11 on light volume and gold to 1373.60 on heavier volume. It does not look like many long-side stops were actually hit in silver, but a moderate number of gold longs were flushed. Interestingly, the dip in both metals was bought, and 3 hours later silver broke out on some decent volume, as the new silver shorts were stopped out. Upward momentum continued, and now silver is trading at 24.17 +0.65 [+2.82%] up substantially from Friday’s close. Gold is lagging – it has only moved back close to even.
Likely this move washed out the last of the PM “safe haven” traders from last week.
One famous trader saying is, “its not the story that matters, its the reaction of the market to the story that counts.” Watching last week, I was unable to see any particularly strong upside pressure in the futures markets in response to the whole alleged Syria/Safe Haven trade. At the same time, PM was becoming seriously overbought, which is a dangerous point to start entering long. So – a limited market reaction = “safe haven” isn’t a big force, either on the upside or the downside. This was confirmed today for me when the “safe haven failure” selling got bought.
So – is gold viewed by the marketplace as a safe haven? My opinion: not currently in the west, and thus not by the futures markets. And don’t shoot the messenger here. I just read the tea leaves, I don’t control what the market does. And before anyone explodes, no I’m still not working for the banks.
Now I certainly consider gold to be one of my own personal insurance policies against currency issues. It is one of my safe havens. That’s my internal storyline, and I believe that will most likely play out at some point in the 5-20 year timeframe. And it may happen sooner than that due to something I cannot see coming. But from what I can tell, the futures markets (and likely Managed Money) do not currently see things my way. I’m ok with this. As a result, I keep my core position based on my internal storyline, but I do not “load up” on futures or gold mining equities when I see the marketplace doesn’t currently agree with this storyline.
It is normal for people to trade their storylines and not watch how the vast majority of managed money behaves. This makes sense for long term strategy, such as buying PM for your core position. But paradoxically, it is quite counterproductive when trying to actually trade the markets in the nearer term. So for my futures, options, and equity trades, I watch the marketplace and I don’t try and emotionally “impose my will” on it, growing angry when the marketplace doesn’t follow my storyline on a week-by-week basis.
So. Gold. Safe haven? Not in the west, and thus not in the futures markets.
Now then if I lived in India, I’d likely have a larger-than-normal-sized core position in PM. It would need to be physical in order to avoid government repression in the other instruments. Would I be loading up on futures and/or equities with gold at rupee 91,000/ounce? Probably not. I’d probably be a seller here. After such a dramatic move down in the currency, with the whole world conscious of the issue, it is likely at or near a near term market peak, similar to what happened in the Yen and/or JGBs a few months back. The rupee could still break lower, but when I hear about “biggest downside moves on record” I always imagine capitulation, and that’s never a great time to be going short.
Speaking of which, does anyone know the 10 year JGB is now at 0.73%, down from its peak of 0.94% hit at end of June? Note I’m not suggesting Japan will finish with a happy ending, just that markets move in cycles, and typically don’t move in straight lines – and that near term peaks often coincide with peaks in popular interest, resulting in short-term “crowded trade” situations that usually end up retracing at least to some degree once traders realize the world isn’t going to end tomorrow and bail out. Which is why I try not to trade newsflow.
I might consider shorting JGBs *now*, after the move down from 0.94 to 0.73, after Japan has fallen out of the headlines – but where the problems all still remain. But I have no position.
So to sum up my point:
* Owning insurance against a black swan and/or grey swan with uncertain future timing = strategic decision
* Ignoring marketplace signals while trading shorter term on that very same belief system = Dumb Money