Gold: A Short Story
After a few years of perusing Seeking Alpha on a daily basis, I finally felt courageous enough to post my first article regarding an investment idea that has been swirling around my 25 year old head. For the purposes of full disclosure, it is also a trade that I’ve recently executed.
The idea for a shorting the GLD struck me rather abruptly, as Steve Wilkos (Jerry Springer’s ex-bodyguard) was advocating for selling gold to some fly-by-night dealer that apparently offers “The Best Price for Your Gold!” Now, I’m perfectly aware (as I imagine most you are) of the underlying implications regarding the validity of gold’s place as a “long term hold” inside one’s portfolio, however, I believe there’s too much hype around the perpetual increase of the price of gold (i.e. GOLD $5000 by 2015!!) So here are a few reasons why I bought some Mar11 GLD puts:
1) Disconnect from the USD
Although the dollar has been collapsing recently, the DXY is still above the lows experienced during the summer of 08’ and fall of 09’. Meanwhile, GLD is trading at an 85% and 30% premium above those levels respectively. Historically, the “falling dollar-rising gold” relationship has been a rocky one, however, the discrepancy here is too large to ignore. Also, the $3.2 trillion daily FX market has a history of sharp reversals as trades become too crowded, so expect some buying of the USD as the Dollar Index approaches these lower levels once again.
2) Rising Wedge Formation
GLD has been forming a rising wedge pattern with the upper trendline beginning May 08’ and the lower trendline beginning Oct 08’. A violation of the lower trendline puts the technical price target at $1050 per oz. I encourage everyone to locate this pattern on their own trading platform. Unfortunately, exporting chart data isn’t my forte!
3) More Quantitative Easing? A potential “SO WHAT!!” for gold
While the Fed has hinted at more quantitative easing, it hasn’t indicated the way “QE2” will be carried out. I cannot imagine it being another consumer stimulus or tax gimmick. Both are politically unpopular and have proven to be ineffective. The Fed will probably end up purchasing more Treasuries to keep interest rates down in the short-medium term. This move enables continued low mortgage rates and encourages further mortgage refinancing (mortgage refi-applications are at all time highs). Meanwhile, the Treasury ends up making interest payments to the Federal Reserve which stashes the money back as reserves and never circulates in the economy anyway.
These factors, combined with the lack of inflation in either the CPI or PPI data could potentially dishearten “GLD Band-Wagoner’s” in the near term. At least, that’s my bet!
Disclosure: Short GLD