Gold Futures Close at Highest Level Since 1980
October 28th, 2007WARNING: This is not a recommendation to buy, sell or hold any financial instrument.
I worry more about Cryptogon readers’ investments than my own.
When I see the commissions on BullionVault, before I think, “Wow! That’s great!” I think, “I hope folks are diversified. I hope they know when hedging might be an appropriate option.” (Key word: Option. As in, put option.)
Several Cryptogon readers have taken positions in physical gold that, I’m almost sure, are larger than what would be considered prudent by even the most in-the-bunker financial planners. Very few people in the world are in a position to hold hundreds of thousands of dollars in physical gold as a component of a diversified portfolio—even a portfolio geared toward doom—yet, there are several Cryptogon readers who have done this. (Yep. Cryptogon is read by bag people and millionaires alike.)
If your outlook is years, or decades, stop reading now. But… If you chased this recent move, if you’re in heavy and sweating it…
Look at that weekly chart. Throw a stochastic and RSI on that thing. Look back to the left. Notice the other times when those indicators got this whacked out, and the resulting red candles…
It’s like a rubber band that has been stretched very far one way. When it is released, it whips back hard the other way. I’ll be the first one to admit that oscillators can go extreme for a long time, and, on gold, they have. It has been happy days for gold bugs.
My concern now is that the oscillators have been extreme for weeks and now the press is fanning the flames. There is so much negative economic news. There is literally a consensus in the media now about “safe haven” buying on gold. This should be a cause of great concern with short term outlook gold longs.
This might be what Dow Theorists call the “Public Participation Phase.” This is the phase in a trend where average retail investors read about something in newspapers and/or see the Money Honies on TV and then actually make an investment decision based on that information.
If you are in a profitable investment, and your outlook on the investment is short to even medium term (depending on how close to vertical the chart has gone), you should be thinking things like: “CAUTION. WARNING. DANGER. The sheep are now doing that same thing as me. The Money Honies are now saying things that I was thinking before the frenzy kicked in. CAUTION. WARNING. DANGER.”
Forget fundamentals, for a moment, as thinking about the fundamentals can really screw you when it comes to anything that’s traded on margin in real time, including gold. Look at that chart again.
Is this it? Is this what gold bugs have been waiting for?
Maybe.
Maybe not.
I’ll be the first one to admit that I have no idea what’s going to happen. It wouldn’t surprise me if I woke up one morning soon and saw a price quote with four digits to the left of the decimal point. In fact, this is what virtually the entire gold bug industrial complex thinks is about to happen. Again, for gold longs: Caution. Warning. Danger.
Indeed, I can’t make much of a fundamental case for gold going down. It seems like gold should just keep going, with all of the panic and uncertainty out there, and the Fed possibly cutting rates again next week. Right? Again, for gold longs: Caution. Warning. Danger.
Am I saying to consider selling?
Not exactly. Gold is, in my opinion, almost certainly going to go much higher in the long term, and if you’re able to withstand the possibly grim whipsaws ahead, stand fast with confidence.
But for those of you who are in heavy, you should seriously consider an options strategy when the thing gets so extreme; like right now. Consider spending some money to hedge your long bets.
Of course, we’re talking about December gold put options. The premiums on the strikes from 725 to 760 seem VERY reasonable.
How about strikes under 725?
Look, if that thing really unwinds, if the speculators—or people wearing black capes and masks—(temporarily) kick the main pole out from under the big top, the move down could leave new gold longs walking funny. New and inexperienced gold players will start to see gold as another four letter word that shouldn’t be uttered in polite conversation. Good. When they tap the mat, buy their gold at a discount.
I wouldn’t call you reckless for taking some put options in the 700 to 720 range. I mean, I wouldn’t take too many of them, and I wouldn’t expect them to ever be in the money… But that’s why I might be squinting at them with one eye after too much to drink.
Anyone who bets against this freight train is probably going to lose money, but that’s not what I’m asking you to consider, you big gold holders. This is a hedge against the unthinkable.
Don’t ask me how They would kill this rally. I have no F-ing idea. My hunch is that it would involve central bank collusion and tons of yellow stuff showing up on the spot market without warning.
The wider economic picture looks unbelievably grim to me. And in nearly twenty years of thinking The End was near, guess what… Here we are.
I’m not the kind of man who plays options anymore, but I’ll tell ya, that 725 strike for $200 (at the moment) is tempting, looking at that weekly chart.
Do you wait for the Halloween Trick or Treat from the Fed? They’re probably going to cut rates again, if you’re to believe any of the thousands of articles saying as much. Gold should spike up on a rate cut. For hedging purposes, use that as your blow off top moment to buy higher strikes on your December puts so that you have a better chance of being in the money on any breakdown by expiration on 11/27.
If none of this makes any sense to you, that’s probably a good thing. And gold could just as easily keep rising. I mean, maybe this really is “it”. Nobody knows, least of all me. But if you’re sitting on several hundred thousand dollars worth of metal right here… Blowing a few grand on some December put options might be worth it.
If you’re interested in learning more about options, there are plenty of resources online (Yahoo’s option education center is pretty good). Options may be traded online for very low fees. I encourage all heavy gold investors to familiarize themselves with the use of options for hedging purposes.
Via: Marketwatch:
Gold futures closed at their highest level in nearly 28 years on Friday, as gains in the metal were fueled by record-high crude prices as well as the tumbling of the dollar to a new all-time low against the euro.
Gold for December delivery rallied $16.50, or 2%, at $787.50 an ounce on the New York Mercantile Exchange. Gold futures posted a gain of $19.10 on the week.
Earlier in the session, gold hit $787.80, its highest level in nearly 28 years. The all-time high for a benchmark gold contract on Nymex stands at $875, set on Jan. 21, 1980.
“Gold is reaching new highs on the back of record oil prices and a weak U.S. dollar,” analysts at Action Economics said.
Gold climbed to its “highest level since January 1980 on a combination of inflation concerns and safe-haven buying in the wake of a sensitive geopolitical environment and renewed concerns about the U.S. growth outlook,” they said. “Coupled with the prospect of further Fed easing this will continue to underpin gold.”
Dollar hits record low vs. euro
The dollar was lower against most major currencies except for the yen Friday, dragged down by surging oil prices and expectations that the U.S. Federal Reserve will cut interest rates again next week. The euro was trading at $1.4383. Earlier, it rose to $1.4392, its loftiest level since the European unit began trading in January 1999. See Currencies.
The dollar index, which tracks the performance of the greenback against a basket of other major currencies, fell 0.3% at 77.04. Gold, as a dollar-denominated commodity, benefits from dollar weakness.
I can tell you one way that this rally could be killed. Get margined paper longs strapped for cash, force them to liquidate their long gold positions to cover margins. This could happen by a sharp downturn in the overall stock market, or even just in a couple of key sectors. Not getting repayed on short term commercial loans could exacerbate. Not getting a funds rate cut tomorrow could trigger. (This is not a prediction – just a possible scenario that could kill this rally.)
Yep, if somehow the Fed doesn’t cut tomorrow, watch out. I was just typing a post on this now, as a matter of fact…