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Sammy Pollack
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I have been an independent trader in the Forex, Stock Market, and Commodity markets for many years. I also serve as the managing director of a charitable fund. Follow me on Twitter @spollack10
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  • Could gold de-couple from the Dollar
    While most risk assets have rallied considerably on news of the ECB's LTRO, gold and silver have not. The precious metals have not rallied because the dollar has remained incredibly strong. A 6 month chart of the U.S. Dollar index is shown below.


    (cnbc)

    As you can see, the dollar has not given up much of its recent gains. Gold and other precious metals have been moving inversely from the dollar. A 6 month chart of Gold is shown below.


      (cnbc)

    Gold is near 6 month lows, this compares with the dollar which is at a 6 month high. So far, there has been no sign of a breakdown in the inverse relationship between gold and the dollar. However, this could soon be about to change. At some point, it is likely that gold reacts to the fact that the LTRO means increased liquidity. Increased liquidity will mean that money will find its way into gold like it has found its way into stocks already.

    It is likely that the dollar will remain strong because of the LTRO. The LTRO has lead to an increase in the amount of Euros out there which has significantly lowered demand for Euros. So while the LTRO is bullish for the dollar, it is also bullish for gold.

    In the short term, it is unlikely that the link between the dollar and gold will be broken. However, over the long run it is possible that this relationship will break down. Investors should wait for the moment when the dollar and gold stop moving inversely. This change could occur any time between the next few days and the next few months. Investors should not buy until this change occurs, because the dollar is likely still going higher in the short term which should keep gold under pressure for now.



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Dec 29 10:33 AM | Link | Comment!
  • Low VIX means stock market remains at risk
    With no end in sight to the crisis in Europe, the stock market is setting up for a major crash. While the Euro, Gold, and Silver have all plunged to new lows over the last few weeks, the stock market remains elevated. The S&P 500 is currently trading at 1219. This is far from the 1074 low seen at the beginning of October. The stock market's resilience is nothing more than complacency. Problems in Europe have only gotten worse from the time the S&P was trading 1074. The problems in Europe will catch up with the stock market soon enough, but the complacency in the market is what leads me to believe a crash is imminent. The chart below shows Italian bond yields.


    (bloomberg)
    As you can see, the crisis in Europe if far from over.

    Right now, the crowd seems to believe that nothing catastrophic will come out of Europe over the next few weeks. This belief has manifested itself in a lower VIX. The December VIX has been hovering around 25. This is a far cry from levels between 30 and 45 that we have seen throughout the European crisis. The VIX at 25 indicates that the institutional money is largely convinced that no market crash lies ahead. However, this is the exact reason a crash may lie just around the corner. Because no one is expecting a really bad event, if we get one it could be catastrophic. When the VIX is elevated, it indicates that investors are buying protection in the form of puts. This means that when we get a really bad event, many large investors are protected by their puts. Right now, big money is not prepared for a market collapse. For this reason, if we do get a bad news event the result may be a crisis. 

    The chart below shows the VIX over the last 6 months.


    (cnbc)

    VIX is indicating that invesotrs are no where nearly as fearful as they were earlier in the year. This compares with Italian bond yields that are much higher than where they were earlier in the year.

    What could cause the crash?

    - A failure of a European bank. The market expects that no banks will fail because of the unlimited loans being offered by the ECB. What if a bank faces a run and simply does not have the funds to meet customer demands?

    - A split of the EU. While all the leaders appear committed to the union, it is entirely possible that either Germany or Greece leaves the EU. Both nations remain committed to remaining in the EU, but this could change...

    - Downgrade of Germany and France's credit ratings. If Germany and France get downgraded, then the crisis becomes more difficult to contain.

    Conclusion:

    The Stock Market is very vulnerable to bad news right now. The events mentioned above are not priced into the market at these levels. With the VIX trading where it is, it seems wise to purchase protection in the form of puts.


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Dec 20 10:48 PM | Link | Comment!
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