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  • Why Is Gold So Weak Today?

    By Jonathan Chen

    Normally when stocks are getting crushed, as they are today, gold is a safe haven.

    Right now, however, gold is plunging, down another $50 an ounce today,hovering just above $1,800 an ounce.

    This begs the question - why?

    There are two schools of thought on this. One is that investors are beginning to see that the problems around the world are not as bad as they have been made out to be, and risky assets should be seeing inflows soon. Most, if not a vast majority, are not in this school, as Europe did not just suddenly solve its problems. Just look at Greece.

    It is barely hanging on by a thread, but most likely will default by the end of the year, if not sooner. The yield on Greek 1 year debt is over 100%, and there is little chance that this situation can sustain itself for more than a few weeks. Prime Minister George Papandreou claims the country will not default, but given its economic state, very few believe him.

    So if this is the case, and Europe is still a financial disaster, then why is gold plunging?

    The other school of thought is a recession is around the corner, or perhaps something even worse. Depression, or the big "d" word is being thrown around.

    All the economic signs are there for gold to go higher, perhaps as high as $2,000 an ounce by the end of the month as some have claimed.

    However, if the situation in Europe is worse then many are letting on, including members of the European Central Bank, Angela Merkel and Nicolas Sarkozy, there may a situation like we had in 2008. Every asset, including precious metals, and other commodities, were sold at fire-sale prices, as investors tried to get whatever they could for them. Oil was sold down to $30/per barrel, and the S&P fell as low as 666. If you look at this chart, gold was also a victim of the asset sales. Gold peaked around $1000 an ounce early in 2008, then along with every other asset class, fell 20% from these highs.

    If and when Greece topples over and defaults, it is going to be catastrophic. How catastrophic it will be has not been determined yet. Some have said it could be as bad as Lehman Bros., while others think it may be like Bear Stearns. If this happens, no asset class is safe, and gold could be subject to sharp sell off, as hedge funds, and other institutional investors will sell anything to lock in a profit.

    Right now, there is a rumor going around that China may come in and save Italy. It is no secret that China and Europe are joined at the hip, with a significant amount of Chinese goods being shipped to Europe. If Europe collapses, China goes down with it, as does gold. Everything is inter-connected now.

    Traders should keep an eye on the spot price of gold, and forget all of the surrounding noise.

    Today's $50 an ounce sell off might be just simple profit taking, but given the history of the metal and what we saw just three short years ago, it might be signaling something far worse.

    ACTION ITEMS:

    Bullish:
    Traders who believe that gold will resume buying after a technical correction might want to consider the following trades:

    • Add to SPDR Gold Trust ETF (GLD) and PowerShares DB Gold Double Long ETN (DGP) if you believe gold is just in a small correction.

    Bearish:
    Traders who believe that gold is selling off for far more ominous reasons may consider alternate positions:

    • If we begin to see gold really sell off, that could be signaling everyone is moving to cash, for fear of another recession, or perhaps even a depression. In this case, short gold, shorting the above mentioned securities.
    • Traders can also short the gold miners, such as Barrick (ABX), Goldcorp (GG) and others.


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: GG, ABX, DGP, GLD
    Sep 12 4:47 PM | Link | Comment!
  • Double Top in Gold: Time to Sell?

    By Benjamin Lee

    In the current market, would you be content with a one year, 50% return on investment? That is precisely the question that investors in gold are going to have to ask, and ultimately answer for themselves.

    Early Tuesday morning, gold futures (/GC) hit an all time high of $1923.70 on heavy volume, as worries in Europe continued to take their toll on world markets. The move translates into a 55% jump in gold prices from this time last year.

    The jubilation for gold investors quickly soured, however, as the commodity was immediately sold off, once again moving below $1900. The previous high of $1917.90, which was recently set on August 23rd, was also quickly sold into, leading to a vicious 11% move to the downside (to $1705.40) in just three days.

    It appears as though a similar scenario is currently unfolding, as bulls could not manage to hold the $1900 level yet again – this time forming a bearish double top pattern in the process.

    What is especially troubling for investors is the decoupling of gold's relationship with the overall market in today's action.

    The formula over the past year has been simple – market selloff = gold surge. That trade has broken down today, as all major U.S. indices are currently down over 1%, while gold futures are virtually unchanged.

    Divergences such as the one noted above often serve as clear warning signs that a trade is about to undergo a massive correction.

    Put it this way, if panic and market selloffs no longer support inflated gold prices, then what will?

    The meteoric rise in gold prices over the past year has been justified by the need for a “safe haven” for investors during times of uncertainty and market turmoil. If that sentiment dissipates, then gold will plunge, as there is no longer a catalyst to support such a high valuation.

    In addition, there are rumors on the floor of the CME that additional margin rate increases for gold futures are imminent. Traders are worried that the rate increases will have a negative effect on gold prices, the same way they contributed to silver's plunge earlier this year.

    Betting against gold has been a losing proposition for quite some time, however all good things must come to an end. The inability to hold the $1900 level for the second time may serve as the catalyst that finally sends gold prices back down to earth.

    Time will tell.

    ACTION ITEMS:

    Bullish:

    Investors who believe that gold still has room to the upside might want to consider the following trades:

    • Manage your risk. There is no doubt that gold has rewarded investors will great returns, however, no one ever went broke taking a profit. Taking a bit off of the table at current levels to lock in gains is a prudent idea. Should gold break above $1920 again, that would be a great time to reenter, as a push to $2000 would appear likely.

    Bearish:

    Investors who believe that today's action is a precursor to a large downside move in gold prices may consider these alternate positions:

    • At such high levels, the risk has transferred squarely to the bulls. Getting short a large position here with a minimum target price of $1704 ($1600 looks likely) and a stop out above the all time high of $1923.70 provides for a fantastic risk/reward ratio.
    • If you prefer ETF's, check out the SPDR Gold Trust (GLD). Selling 180 to 185 strike calls for a nice premium is a good way to pad your account with some extra cash, while still leaving some room for error.
    • If you want to be really aggressive, pick up some out of the money calls – somewhere around the 160 strike, which would equate to roughly a 10% downside move.


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: GLD
    Sep 07 10:20 AM | Link | Comment!
  • One Piece Of Advice: Never Bet Against Women's Shoes

    By Jonathan Chen

    There are a few things in life you should always count on. Taxes. Death. Women's shoes.

    Women's shoe retailer DSW (NYSE: DSW) continues to beat every expectation on Wall Street, and raised its guidance as well. For the quarter ended July 30, Columbus, Ohio-based DSW reported earnings of $3.96 per share on share. Excluding the one-time gain from buying Retail Ventures, the company reported earnings of 74 cents per share on $476.3 million in revenues. Wall Street had been expecting earnings of 63 cents per share on $459.7 million in revenues. In addition, the company raised its 2011 earnings outlook. It now expects to earn $2.70 to $2.85 per share. Wall Street is calling for earnings of $2.40 per share.
     

    "We continued our strong performance in the second quarter, delivering double-digit increases in sales and comparable sales, expansion in gross margin and solid earnings growth driven by the success of our format and our strategies," stated Mike MacDonald, President and Chief Executive Officer, DSW Inc. "We believe our sustained momentum is a clear indication of DSW's authority in the footwear category. The second quarter marked our eighth consecutive quarter of strong comparable sales approaching or equaling a double-digit growth rate. The second quarter also represented a significant milestone for us as we completed the merger with Retail Ventures, Inc. In our ongoing efforts to increase value for our shareholders, our Board approved a special dividend of $2.00 per share and the initiation of a quarterly cash dividend payment of $0.15 per share."
     

    "During the quarter we increased our men's and accessories penetration while continuing to grow women's fashion footwear," MacDonald continued. "We also launched our mobile website and kids' shoes online to further our market share gains in the high-growth e-commerce business. Despite economic uncertainty and equity market volatility, we expect fiscal 2011 to represent another strong year of growth and increased value for all DSW stakeholders."
     

    DSW has seen its revenues jump 15% year over year, and with its moves into men's shoes, as well as increased growth in accessories, DSW is firing on all cylinders. Cash and investments totaled $418 million compared to $305 million at the end of the second quarter 2010.
     

    DSW trades under 15 times 2012 earnings, and sports a 1.3% dividend yield. The company, which competes with Collective Brands, Inc. (NYSE: PSS) has been able to capture the hearts of shoppers and investors alike. Shares are up ~21% on the year, severely outperforming the S&P 500.
     

    There are just some things you do not bet against in life. Women's shoes appear to be one of them.
     

    ACTION ITEMS:

    Bullish:

    Traders who believe that DSW will continue to do well might want to consider the following trades:

    • At less than 15 times 2012 earnings, DSW is cheap. Growing 15% year-over-year indicates the earnings multiple is nowhere near the high side. Investors may want to consider looking at DSW shares.

    Bearish:

    Traders who believe that the U.S. economy is going to slow down may consider alternate positions:

    • Women love shoes, but if the money is not there, the money is not there. If the U.S. economy goes into a recession, consider shorting consumer discretionary names like DSW.


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: PSS, DSW
    Aug 31 10:14 AM | Link | Comment!
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