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Gold $1,000: Short of the Decade

 

 

Why do I feel gold is the short of the decade you ask? Lest we forget the decade concludes in just a few months. Though yes, I am one of the few people in this market who is willing to go on the record as bearish gold at this particular level.
 

Sure, current geopolitical risks including: the global economic meltdown, war in the Afghan, Iraq and elsewhere throughout the Middle East, tensions with Iran and N. Korea, all prove demand for the safe-haven commodity should remain high into the foreseeable future. Perhaps justifying a continuation in this monumental rally in the price of gold to somewhere above, oh I don't know, $1 zillion per troy ounce before all is said and done.
 

Contrarily however, I also believe it is fair to say many of those factors that serve as a guiding light for investors seeking refuge in the safe-haven over the past decade were quelled substantially in recent months as compared to a median evaluation of perceived geopolitical unrest over the past 10 years.
 

Also worth noting, there are many factors that impact the price of gold: from the demand of central banks around the globe, to exchange rates, the gold/silver ratio, discrepancies between spot verses futures pricing, mining companies, the marriage rate of farmers in India (this potential catalyst for a continuation was actually cited via a detailed path of causation on Bloomberg airwaves earlier this week), as well as the sizable increase in pawn brokers advertising on financial news networks and late-night infomercials, speculators (or what Wall Street refers to affectionately as specs ), CFTC rulings, to solar flares, and the amalgam goes on ad infinitum.
 

With this myriad of factors at play clearly one must strive to remain vigilant in the steadfast pursuit of determining potential impetus in price of the precious metal. So why bank on all those forces aligning in one clear direction for you to take a smart position on potentially decreasing perceived geopolitical risk, and a subsequent move from the so called safe-haven to a flight to quality and growth by investors globally?
 

The answer is you don't have to.
 

Sure, as is the case in many things in life, you must decide on one or the other. For example you must decide unequivocally on certain matters such as where to live: You cannot live 50% in New York and 50% in Florida, that is unless you're a retired finance professional of course. What I'm trying to say here is that there is no way to be in two places at one time, as is seemingly what is required to generate alpha returns trading gold as it teeters dangling over the precipice of this key echelon. Thinking one step ahead however, you can put yourself in position to take advantage of favorable uncertainty if in fact just such a scenario ultimately comes to fruition.
 

Allow me to expand.

 

$1,000 represents a key psychological level and historical resistance. All-time highs just above the ominous "big figure" coupled with other key inflection points, offer the precise measures necessary to establish a sound quantitative strategy with a favorable risk/reward ratio, and perhaps a solid foundation for a long-term investment short this potentially over-evaluated precious metal should this market continue lower thereafter. Working with the known information combined with the "known-unknown" (that is a range of possible events and each corresponding approximate likelihood of the event occurring) regarding the current evaluation of gold, we can take an intelligent, quantitatively sound position on what market practitioners refer to as a "retracement".
 

Historical pricing in the precious metal suggests equilibrium rests somewhere below $700 to $750, as implied by the culmination of spike lows back in '08 that occurred following the first failed attempt at sustained trading above $1,000, and the $300 cost at the onset of the decade. Applying the known information with the known-unknown, we can trade short garnering a positive expected value when placing a hard stop in the vicinity of $1150 to $1200.
 

Now you're probably asking: Why trade with a marginally positive expected value, why not instead look for a sure thing (if such a thing does in fact exist), or trade after the markets moves lower, say below $900? Well, you are unlikely to fail trading a positive EV no matter how small the edge, more importantly however, this initial entry into the market represents merely a taste of the massive short position you will have accumulated by the time the market reaches the first profit objective somewhere below $850.
 

The true intrinsic value here is the opportunity for you to manipulate what may become an extremely favorable basis at the onset of 2010 by initiating a short now that offers slightly better than coin flip odds. Importantly, when optioning this proposed “long-term arbitrage” (50:50 proposition) today, investors may have an opportunity at gaining a moderate to substantially favorable position on the market down the road, which in-turn allows you to take on additional positions subsequent the market topping out, that without the favorable basis may otherwise lack profitability.
 

Check back with me for updates on this development in the precious metals market as they occur.