The Amount of Managed Money Currently Invested in Gold

Now that gold is rangebound, how do you make money trading it? That's easy - treat it like a wooden pony and straddle that thing.

For the details on this trade, in more professional terms as well, check out Brad Zigler's article for Hard Assets Investor:

So what's an investor to do? Well, you can certainly sit tight and wait. But if you do, you'd be passing up an opportunity the market doesn't hand out every day—cheap volatility premiums.

Option traders know all about volatility: It's one of the primary drivers of option costs. When volatility contracts, as tends to happen in range-bound markets, option prices soften. So much so, in fact, that the purchase of option straddles and strangles becomes attractive.

A straddle is a combination of a put and a call on the same asset, each sharing the same expiration date and exercise price. A strangle is similar, but the options' strike prices are different.

You can read Brad's full piece here.

The potential risk here, at least IMHO, is if the next potential wave of deflation finally comes to fruition, taking down everything, gold included.

But if you believe that gold will be rangebound for a bit here, straddles are definitely an interesting potential play.

And here's a VERY interesting chart that Brad posted in his piece - it shows another reason some smart money is wary of gold at these prices - because managed money is heavily in gold right now, which often indicates a shorter term top in price:

Chart courtesy of Hard Assets Investor.

Gold has had a heckuva run, it could easily trade sideways, or even pull back sharply, and still be within the confines of a larger bull market. Nothing goes straight up or down - trade accordingly!

Gold CAN Still Go Down; Trading Against Jim Rogers and Richard Russell; Worst Case Scenarios Already "Priced In"

So Gold CAN Still Go Down, After All

Last week was shaping up to be another banner one for gold, as the old relic kept on climbing, day after day...that is, until it stopped.

Gold's one-way rise experienced a sharp setback on Friday, dropping nearly $50 on the day, and over $60 in intraday measures.

Friday was the biggest down day for gold in some time.

(Source: Barchart.com)

Perhaps related, perhaps not, The Financial Times reported on Wednesday that China is wary of the danger of a gold "bubble" (hat tip to my good friend and regular reader Super Joe for sending this link along).

Hu Xiaolian, the vice-governor of the central bank, said Beijing would not buy gold indiscriminately.

“We must keep in mind the long-term effects when considering what to use as our reserves,” she said. “We must watch out for bubbles forming on certain assets and be careful in those areas.”

China announced this year that it had quietly doubled its gold reserves to 1,054 tonnes, the world’s fifth largest holding. India has also joined the rush, gobbling up half the IMF’s gold sale.

China's ever-increasing interest has spawned the popular gold bull theory that the Chinese have established a "$1,000 floor" price for the metal. In other words, with the Chinese buying up more gold on the dips, one needn't worry about the possibility of gold ever dipping down to triple-digit territory ever again.

The only problem with theories like this is that, however sound they may appear, they are usually wrong. The market takes great delight in squashing "absolute" myths and theories, and I suspect this one will be no different.

But - you may interject - with the government printing money like it's going out of style, won't that result in rising price inflation, and rising gold prices? It sure may - I just suspect that it will take longer than most investors anticipate, thanks to the massive amounts of credit that will be written off in the coming years, resulting in some wicked near-term debt deflation.

Trading Against Our Hero, Jim Rogers

Anytime you find yourself on the other side of the trade from Jim Rogers, you probably want to seriously reconsider your position.

That's where we find ourselves now, though, with Rogers continuing to reiterate his distaste for the dollar. To be honest, I don't like the dollar fundamentally either, but believe that paradoxically, it's due to rise in the near term because of its inherent flaws.

In other words, I agree with everything Rogers says, except for his timing. We'll see who's right - I wouldn't blame you one bit for siding with Rogers - but I'm sticking to my guns on this one...at least for now.

And...Richard Russell, While We're At It

The Great Richard Russell believes that gold is going to move higher, no matter what happens, according to The Daily Crux.

Question -- What would it mean if Industrials and Transports broke out to joint new highs?

Answer -- I think it would mean that the Bernanke Fed was beginning to win the war against deflation, and assets were once more beginning to inflate. In that case, gold should move higher.

Question -- What would it mean if this advance topped out, and the bear market was taking over again?

Answer -- I think it would mean that the Fed had lost its battle against inflation. If that was the case, I believe the Fed would spend even more, there would be even more stimulus programs and interest rates would remain at zero "for the duration." In that case, gold should move higher.

(Source: The Daily Crux)

Well I hate to trade against Russell too - a true legend. But, the dollar bull/gold bear camp is so deserted, that I guess it just comes with the territory that our favorite investors will be on the other side of the trade...because there are so few on our side!

Why Worst Case Scenarios are Already "Priced Into" These Markets

Tom Dyson, one of my favorite investment writers/analysts, is also one of the very few lone soles left in the debt deflation / dollar bull camp (last one out, please turn out the lights!)

Last week, Tom penned an article that I thought articulated the case for a near term dollar rally brilliantly - and our good friends at Stansberry & Associates were kind enough to allow us to reprint the piece in it's entirety here.

Positions Update - Still Really Short the S&P, Long the Dollar

Nothing's changed here - still waiting for the dollar to bottom, and the S&P to top. It's been a maddening wait.

We think the dollar is the lynchpin to the whole equation, and that a dollar bottoming should roughly coincide with a top in the other markets. Friday was an encouraging sign, as the dollar rallied sharply. Has it finally put in a low? We shall see!

The dollar rallied sharply on Friday to end the week - did this mark the start of a mega-rally?

(Source: Barchart.com)

Though this rally appears to be running on fumes, it's still running...at least for now.

(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $17,217.50

Cashed out: $20,000.00
Total value: $37,217.50
2009 Returns: Ugh, too depressing to calculate right now...

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000

More Gold Hysteria; The Dollar's Latest Eulogy; The Easiest (Worst) Short Idea on the Planet?

Gold Featured on...Saturday Night Live!?

The latest sign that the gold market may be a little overheated right now...Saturday Night Live's Weekend Update featured investment analysis from Scrooge McDuck!

http://www.nbc.com/saturday-night-live/video/clips/update-scrooge-mcduck/1165594/

Shout out and thanks to my good buddy Super Joe for sending this one along!

New Reports of the Dollar's Demise: Greatly Exaggerated?

From London's The Independent comes the latest report of the dollar's impending implosion - in an article fittingly titled The Demise of the Dollar.

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

I've read a few publications jumping all over this story today - the sky is falling, the dollar is doomed!

Have to say I'm skeptical. Governments are the ultimate investment herd! This is another great cue that the dollar has indeed put in a major bottom.

The dollar is showing some resiliency around the 76 mark. Time will tell if this latest "demise of the dollar" story is as ill timed as many from recent history.

Non-Confirming Charts

If you're a trend follower, you love to see something making an all-time high, like gold is today. All bets are off, as who knows how high it will go! Just go long and hang on.

And while I do respect and try to follow trends, the reason I'm not jumping on the gold bandwagon right now is that it seems quite crowded. I could be wrong - it could be like tech stocks in 1998, where the fun was just getting started.

But it seems strange that gold is making new highs all by itself. Check out oil, which is still below its highs for the year:

Crude oil can't break $75 decisively.

(Source: Barchart.com)

Perhaps this is an indictment on the global economy. You know investors are taking a defensive stance when they favor an asset in gold that doesn't really do anything, over the black goo that powers the global economy.

Also of note, silver has not yet confirmed gold's record highs. Silver still sits solidly below its 2008 highs - not to mention it's all-time high in the $50 range.

Silver still hasn't broken its 2008 highs.

(Source: Barchart.com)

But the thing that puzzles me the most - so much so that I wrote a haiku about it on Friday - is the long bond.

If we assume that gold is rallying on inflationary fears and money printing - fine, I can accept that as a plausible explanation. But then why are interest rates on long dated government not skyrocketing? Why are rates on the 30-year not barreling towards double digits?

For the past two plus years, the most obvious short in the investing world has been long dated US government debt. In fact, this short has been such a "sure thing" that it couldn't have worked out any worse for investors who put on this trade - myself included! Though I can't feel too bad when even the great Jim Rogers got burned as well.

Bottom line: If gold is rallying on inflationary fears, then why are interest rates not following suit? Someone please enlighten me!

The most obvious short on the planet...only problem is that it's not going down!

(Source: Barchart.com)

Some More Good Reading

• An insightful interview with Fourth Turning co-author Neil Howe

• Hedge Fund manager ditches Wall Street to pursue his true passion: Tequilia!

Positions Update - Still Long the Buck

And still waiting to see where the next move will be. With sentiment so low I'm guessing it'll be up.

The appears to be the lynch pin to the markets, so it will be interesting to see, if it does rally, what the other markets do. My guess is that they'll tank in unison. We may find out soon!

Reports of the dollar's demise have, until now, been greatly exaggerated.

(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $24,789.83

Cashed out: $20,000.00
Total value: $44,789.83
Weekly return: -2.7%
2009 YTD return: -51.2% (Yikes!)

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000.00

Using the Wall Street Journal to Gauge Investor Sentiment

I thought it’d be fun to peruse the Wall Street Journal to see if we could glean some insights into current investor sentiment. Mainstream business publications are famous for (unintentionally) signaling tops and bottoms in markets – but is this really the case, or more of an old wives tale than truth?

I couldn’t think of a better publication to test out than the Wall Street Journal. Those who believe they’re getting an inside scoop by reading the WSJ are amusingly naïve about their “inside source,” which is read by millions of other investors each morning. Even pre-Murdoch, the Journal wasn’t hiding any investment secrets. These days, it has the added bonus of catering to the masses – combined with its wide reach and coverage, what a perfect match!

So please join me, as I flip through the pages (web pages, of course) in this week’s Journal, in an effort to gain an edge – by taking the other side of the trade!

Further Evidence the Dollar Has Bottomed

From the front page of today’s Online Edition, we see a story entitled:

Small Investors, Big Bets on Currencies.

Oh my. The piece begins:

The dollar is zigzagging, falling below the 90 yen mark Friday and testing the depths it plumbed against the euro a year ago. That kind of action is music to the ears of investors such as Ray Firetag.

As most of America slept on a recent Monday night, Mr. Firetag was in front of his computer in Elk Grove, Calif., wagering on the Australian dollar.

For those of you not familiar with Elk Grove, please allow me to fill you in. It’s a (somewhat lower) middle class suburb about 15 minutes south of Sacramento. From 2002 until about 2006, it was regarded as an “up and coming” neighborhood, where many first-time home buyers in the Sacamento flocked to buy homes that were relatively cheap.

Three years or so after the top of the housing bubble, an astounding number of homes in the town sit empty – either officially foreclosed, or unofficially abandoned – while prices languish 40-50% off their highs.

You should always “short” Elk Grove – always. When their residents are buying homes, you should be selling. When they are trading the Australian dollar in their pajamas, you should probably be backing up the truck to go short!

When small investors are on the front page of the Wall Street Journal trading currencies, you’ve gotta think we’re probably in for a massive rally in the buck.

And Gold is Topping Out

Gold was down this week, settling once again below the $1,000. Thus my search for Gold related stories was initially disappointing, until I came across this great headline:

India’s ETF Investors Make Up for Missing Gold Buyers

Oh boy – this is going to be good!

MUMBAI -- Record prices have forced many of India's traditional gold-jewelry buyers out of the market in recent months, but a new source of demand is on the rise -- investors looking for the safety and convenience of exchange-traded funds backed by gold.

While India continues to be a price-sensitive market, with every rally hitting demand, the rising popularity of ETFs indicates that the Indian market could ...

I can’t read beyond the “…” because I let my WSJ subscription expire a few weeks ago – but that’s OK, it’s really not necessary.

It seems like we’re hearing that India, which traditionally bought gold hand over fist this time of year to, surprising, actually use as jewelry. Now they can no longer afford to buy it – at least for its traditional use.

So they’re speculating on the price instead – and best of all, via ETF’s that take long-only positions!

This is classic stuff! I’m downright giddy right now – I thought of this WSJ concept for a column on my drive to the coffee shop, with no idea that we’d be able to find such fantastic sources.

OK well we can’t just end with two. We need one more to close out strong. We had three wishes…thus far, we’ve used two…we know the dollar is set to rally, and gold is in some trouble.

What’s one more topic we can ask the Swami WSJ to look into its crystal ball and forecast? I got it…

Emerging Markets are Toast

Alright, I am typing “recession” into the search box…let’s see what comes up…OK here we go! Another nice short candidate:

“Emerging” Stock Markets Are Looking Better

The first paragraph says it all:

On the heels of one of the worst years in stock-market history, some experts say investors should shift more money into a surprising area: emerging markets.

Good to know that if you do shift more money into emerging markets, you’ll probably be one of the last investors to the party! This article should sweep in the 11th hour bulls just in time for the rally to die.

On the heels of 50-100% gains in many emerging markets, I can’t see how this could end well for longs. Fortunately we’ve got the WSJ ringing the bell for us here at the top!

When the global markets turn down again, emerging markets are likely to get slaughtered. What great short candidates!

Three Solid Trade Ideas

Well kids, here’s what we’ve learned from reading the Journal this week:

1. Bet on the buck
2. Short gold – or at least stay away from it
3. Short the heck out of emerging markets

We’ll check on these trades in a few months to see how they worked out. In the meantime, can the last dollar bull out the door please turn out the lights!

Checking in on Our Leading Market Indicators

They are on the ropes. Can we get a standing 8-count?

On our August 16th update, we picked out three indicators that have led the markets over the past few years. They were:

1. China – the poster child of this economic recovery
2. The Baltic Dry Index – when the global economy is healthy, more stuff gets shipped
3. Oil – which is still the fuel for the global economy

When we last pulled up the charts on these, they were not looking so hot. All three had turned down. I thought this was probably a bad sign – but added a disclaimer that if they rallied to new highs, I’d be wrong.

You can check out the latest charts by revisiting that post and – here’s a cool feature of the charts – just mouse over them, and use the “hand” to drag them over to today’s date:

http://commoditybullmarket.blogspot.com/2009/08/why-commodityshipping-weakness-could.html

If a picture’s worth a thousand words, an interactive one has to be worth a multiple of that. You’ll see that these sick charts have gotten sicker since we last saw these three patients.
Stock market bulls, beware!

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Positions Update - Still Long the Buck

The dollar continues to see strong support at these levels, while sentiment appears to still be quite negative. The dollar's performed pretty well over the past couple of years for a sick, doomed currency!

Reports of the dollar's demise have, until now, been greatly exaggerated.

(Source: Barchart.com)

Open positions:

Thanks for reading!

Current Account Value: $25,239.83

Cashed out: $20,000.00
Total value: $45,119.83
Weekly return: 0.5%
2009 YTD return: -50.3% (Yikes!)

Prior yearly returns:
2008: -8%
2007: 175%
2006: 60%
2005: 805%

Initial trading stake: $2,000

How Investors Feel Today About Gold

Thanks to our friend and guest author Jon Lederer for forwarding along these investor sentiments about gold:

Are we heading for the decisive break above $1,000 that frustrated gold investors (my former self included) have been waiting for? Time will tell!

What if gold does motor right through $1,000 en route to $1,100 and higher? Then it's probably time to dump your dollar and hang on for an inflationary ride!

Related Reading: Why Trend Following Gold and Equities May Be Your Only Hope for Investment Survival