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Clemens Kownatzki
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Clemens Kownatzki is founder and CEO of FX Investment Strategies, a Registered Investment Advisor. An outside-the-box thinker and strategist with 20 years experience in financial markets, Mr. Kownatzki takes a no-frills approach to investing. He has a keen interest in global economic... More
My company:
FX Investment Strategies
My blog:
FXIS Market Insights
My book:
Money Music 101
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  • Bang! Bang! Maxwell's Silver Hammer

    The famous Beatles song came to mind as I reflected on this week's market movements. It was all about commodities in another episode of trader’s nausea but this time, led by some 30% price declines in silver. What lead to the massive selloff will be the topic of endless panel discussions in the days and weeks to come.  Take any one of the possible events below and you could have a good enough reason to produce significant price movements.  The combination of these events however, not necessarily in this order and magnitude of impact, was a perfect recipe for broader turmoil in the commodities markets.

    • Bottoming of US Dollar?
    • Bin Laden killed by U.S. forces?
    • End of Quantitative Easing 2.0 in June?
    • George Soros and other hedge funds exiting silver?
    • Much  higher margin requirements for silver futures?
    • Technical factors, profit taking after parabolic price rises?
    • IPO of Glencore, the largest commodity trader - top of the market?

    There may be several other factors you can include in this list.  For me, it was a much more benign event that led me to pull the trigger on silver the week before.  As I opened the Financial Times to start my daily morning briefing, a big glossy brochure popped out advertising silver as “the most indispensable and miraculous metal on Earth.” This was yet another one of those gold/silver “experts” who’s ads have been mushrooming in the media.  The brochure featured a shiny embossed replica of a One-Ounce U.S. Silver Eagle along with a quote by an unnamed “leading silver analyst” who called silver:  “The best financial asset you can own.”

    Granted, your typical FT reader is usually not of the widow and orphan kind, but still... 

    What timing to tout investors towards a none-the-less speculative investment only to see that investment lose 30% of its value in a week.  How much worse it must feel if an average investor, scared by these ads into buying precious metals, losing almost one third of the investment in 5 days.   While we cannot deny the fact that the US Dollar has lost much of its luster, we must question the inherent (investment) value of precious metals as well.  In particular, one should be wary of parabolic price increases as we discussed last week.  To get a different perspective on silver and to appreciate why some exchanges dramatically increased margin requirements in recent weeks, please consider the chart below showing the recent history of actual dollar values of gold and silver futures contracts.  For some of the big names in the trading community, the recent rise was too much, too fast, and so they pulled out. Very curious to find out if more investors will take the foot off the pedal next week…

    Gold Silver Contract Values

    Silver was the all the rave it seemed until last week. Technicians however, must have been somewhat concerned about the dramatic price changes which seemed to occur rather fast even for traders of volatility-laden commodities. In a span of just a few days, silver fell through several technical support levels.  On Thursday, it pierced through the closely watched 61.8% Fibonacci retracement area indicating a trend reversal rather than just a pause in the underlying short-term trend.

    Silver-Daily

    To get a better sense of the medium-term trend, please consider the weekly chart below.  The sudden rise and fall of silver is more obvious now in the context of the underlying trend channel.  Still bad news if you bought silver anywhere above $40 as it appears more likely that silver will return to the trend channel, possibly reaching an area closer to the $30 range.  Still, the silver bulls may take some comfort from the fact that the major underlying trend remains intact. This breakout may have just been a brief exaggeration in an otherwise upward trending major bull run.  Stay tuned to see how deep the rabbit hole goes. 

    Silver-weekly

    Disclosure: I am short SLV, USO.

    Additional disclosure: Bought put options on SLV and USO
    May 06 7:47 PM | Link | Comment!
  • More on Gold

    You may have expected yet another bumper week for the shiny metal. However, this week marked the first time since mid-summer that Gold has run into some head wind. After a massive bull run reaching new all-time nominal records nearly every week, Gold has retraced about 3% this week. Is this the beginning of the end or was it just a minor pause in an otherwise massive long-term up-trend?

    While taking nothing away from this amazing bullish move in Gold during the past decade, we have been expressing concerns about a possible bubble and listed a number of caveats about loading up on Gold indiscriminately.  Most notably, the concerns are two-fold: a) Gold is not a traditional investment in that it provides no inherent yield or return other than price appreciation and b) Gold is a commodity nonetheless and as such exposed to significant volatility.  You can review some of our previous comments on Gold at FXIS/Gold.  With regard to external and fundamental factors causing concerns, John Authors of the Financial Times expresses these concerns much more elegantly than I can. Please consider: Remember 1980: all that glisters is not gold.

    John Authors makes a sound argument in warning about the speculative element of this ongoing gold run.  Although highly unlikely, one must consider a possibility of a repeat of the implosion in gold prices after the bubble burst in 1980.  At the same time, one cannot ignore the fact that such a repeat would also imply that we are not yet in the final stages of a bubble. Instead, the current bull market might continue to prices above $2,000 comparing the 1980’s peak in today’s in inflation adjusted dollars.  A look at charts may give us a better sense of what some possible scenarios could look like.

    A first indication of head-wind can be seen in the swift price decline of Gold mining stocks measured by GDX, an exchange traded fund tracking gold miners. The medium-term uptrend has been reversed this week.

    GDX-2010-1022

    With regard to Gold ETF (NYSEARCA:GLD) and Gold futures, both have arrived at the lower end of the up-ward trend-line, a test of which may ensue in the coming days.

    GLD-2010-1022   Gold-Fut-2010-1022
         

    Taking a slightly long-term view however, it is clear that the current retracement is just that, a pause in the otherwise continued up-trend.

    Gold-Fut-2010-1022-W

    Examining the near term trend in more detail, we have witnessed some profit taking resulting in typical price declines often measured by Fibonacci retracement levels. Plotting these retracements, we can see a possible further decline to about $1250.  Price declines measured with these tools imply a likelihood of prices within 38.20% and 61.80% declines from recent low to recent high.  Therefore, Gold could trade within a range of below $1300 and about $1250 without violating the ongoing longer term trend.

    XAU-Fib

    Taking a look at a more neutral Gold price indicator i.e. Gold valued in Euros, the precious metal is also trading at an interesting inflection point.  The near-term Gold trend has actually been bearish since the beginning of this summer.  Gold/Euro has now approached an important technical support area.  Failure of this support would make the case of a test of the 900 area.  That scenario would then be a more realistic test of whether the metal is still going to shine with all its brilliance. 

    XAU-EUR

    From a technical perspective then, the long-term bull market in Gold is still alive.  However, there are signs that further profit taking may test the lower boundary of this ongoing mega-trend.  The coming week might shed some more light into the longer-term direction. Meanwhile, short-term traders should be prepared for a bumpy ride ahead.

    This article previously appeared at: FXIS Market Insights



    Disclosure: No positions
    Oct 24 1:39 PM | Link | Comment!
  • Kramer says: You must have at least 1/10 of your portfolio in Gold - I say: Not so fast.

    Confused about inflation/deflation? Don't know whether to jump on the bandwagon and buy Gold as everyone else seems to be doing these days? To be honest, I am confused about it just as well.

    There is absolutely no question that Gold has had an enormous bull run in the past 10 years. If you had bought Gold say in 2005 at around $450 and kept it until now at around $1200 the price appreciation would be a handsome 1 2/3 or 166.67%. So should you buy now before Gold reaches yet another all-time high?

    Jim Kramer of CNBC's Mad Money touted Gold as a must have investment. In no uncertain terms, he said: "Every single person out there should own some Gold." More to the point, he declared that "You must have at least 1/10 of your portfolio in Gold."   “Really?” I thought...



















    Again, I am not debating that Gold has had a great run in the past few years nor do I question the possibility of Gold having further upside movement – the momentum is certainly there.

    But to make a cookie-cutter announcement of a minimum portfolio allocation for Gold is not just questionable, it is dangerous and completely inappropriate for certain types of investors. Short term investors who only have a 2-3 time frame come to mind. Or take retired investors, who rely heavily on generating a safe and regular income, may see themselves loosing out. As a simple insurance policy, 10% seems like a rather high allocation too. More importantly, one should remember that Gold is a commodity, not necessarily an investment, and it “trades” like a commodity meaning, it can be quite volatile at times.

    Then there is the cost of holding Gold.  No matter what format you choose for your gold investment - ETF, Gold coins, Gold bullion, Spot Gold, Gold futures etc. - they all carry a cost to hold the commodity.  That cost can range anywhere from a rather inexpensive 0.25% per annum for an ETF (The Gold ETF: IAU just lowered their expense ratio from 0.4% to 0.25%) to one-off fees of 8-10% or even higher for purchases of Gold coins and Gold bullion.  Those fees, along with your investment time frame should be considered when determining what type of Gold investment is selected.

    But all of this is purely an academic exercise and the real question still remains as to where the price of Gold is heading.

    Jim Kramer, confident as ever, announced that $2000 is the price target.  By contrast, some commentators suggest that Gold has peaked and is about to crash in line with other assets whose prices are threatened by deflation.  James Altucher made some controversial comments in a recent WSJ article when he explained Why Gold Is the Worst Investment Right Now.

    The best answer to me came from Adrian Ash, head of research at BullionVault.com:

    If I knew a price, I would be doubling up tomorrow.

    Although he declares to be long Gold, there is an element of caution in terms of price. That element of caution, coming from someone who works for a firm that should be touting Gold, gives me the right sense of how investing in, or as some say “holding” Gold should be approached.  Despite its allure and glamour, it is a commodity and should be “traded” as such.

    This article previously appeared at FXIS Market Insights

    Disclaimer
    Neither the information nor any opinion contained in this communication constitutes a solicitation or offer by us to buy or to sell any securities, futures, options or other financial instruments or to provide any investment advice or service. Each decision by you to do any investment transactions and each decision whether a particular investment is appropriate or proper for you is an independent decision to be taken by you. In no event should the content of this communication be construed as an express or an implied promise, guarantee or implication by or from us that you will profit or that losses can or will be limited in any manner whatsoever. Past results are no indication of future performance. Please note that there is no requirement and no commitment to make any payments to FX Investment Strategies LLC in order to access our published information be it via email or via website publication. All information is publicly available without any required monetary consideration.  Any payments or donations made by you are deemed to be voluntary and cannot be considered as payments for investment advice given to you.




    Disclosure: no positions
    Jul 17 12:32 PM | Link | Comment!
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