Goldum Boy

Last month, Goldum, a senior Fellow of the Lord of Trading and master of the secret art of options trading, left the dark forces of the Investment Bankers to focus on a long time project of his : the set-up of a pension hedge fund. I'm sure he will be successful in this enterprise and let us wish him the best. Good luck and I can't wait for us to trade together again my Old Friend!

Once again, after Goldum's rush and The Goldum of Solace, I will use his name in a silly pun and write a post about Gold... Again! I know, you will think that I'm obsessed with gold (my preciouuuusssss). OK, I have to confess to you something here : when I was younger and started trading with investment banks, I really dreamed to work for the metal desk and this for one single thing, the job title : "Metal trader".

Wow! "Metal Trader" sounds so cool, you sound like the guy who trades on Guitar Hero listening to Metallica all day long! A business card showing "Sauros, Metal Trader" is much sexier than "Sauros, Structured Credit CDO" that before the subprime crisis was not understandable and after sounded like you're a kind of criminal. It's also more teasing than the later "Sauros, Distressed Asset" (there's a typo on the card and there's no final "s", I wonder why people I gave this card to look at me strangely...)

Back to gold now, the fundamental arguments I have had to justify my long gold position for more than one year can be summarized in 3 points:

- Gold is risk averse
- Gold is short USD
- Gold is long inflation

To me, the first two arguments have mixed to each others for the last few month and have combined to drive the price of gold up. The monetary stimuli and the FED printing press called QE support to a very large extent the USD weakness, and it looks like the freshly printed USD were invested in stocks and drove the indices up. The weak dollar drove as well the commodities up and that included gold. Now the feeling I have is that on the other hand, when the markets have a correction, fear sets in and the safe haven role of gold prevails and it soars too (but to be frank since March we haven't had the opportunity to check what the real impact of a deep correction on gold is....). Consequently it looks like to me that whether the stocks go up or down, the price of gold soars. And that's what drove my trading lately : I'm generally bearish on the USD but when the stock market is incertain, instead of going short USD because I know if the stock market drops the USD is stronger, I just go long gold.

For instance, at the end of October, while the stock market was losing the most of its gains made at the beginning of the month boosted by Q3 earnings (Alcoa, Intel, JP,...), I added on my gold position at around 1040 (the blue triangle on the chart), suffering just 1 day before it went up to 1100 in a few days.
OK you will say I was lucky on this one as the USD didn't drop at the same time and that was the sale from IMF to India that triggered the move. Fair enough, but I would say that to me, the rumours of physical delivery to China last month and the sale to India that highlighted the presence of another main player in the bid for gold this month share the same rationale : it is China and India getting rid of their USD in exchange for Gold so definitely linked to my second point on USD weakness. This weakness is supported by the US gov, despite of Geithner's rhetoric (not sure who he convinced) on a strong USD, a weak USD favours the US growth, the exports, reduces the debt and reduces the losses of toxic assets in banks balance sheets.

Now the third point is the heart of the future debates : inflation vs deflation. Nothing's ruled out yet and for now let's keep our arguments for the battles to come, but I have the conviction that the central banks (FED and BoE particularly) will choose what they consider as the lesser of two evils and keep on favouring the risk of inflation vs the one of deflation keeping their near to zero rates and monetary stimuli for a while, in spite of inflation when it will start showing up.

On the other side of the coin, 2 points scare me on my long term position:
- Firstly, more and more analysts forecast that gold will skyrocket. I hear 2500 in early 2010 (Jim Sinclair notably) and even 5000 in the long run. As said Jim Rogers recently : whenever you have everybody on the same side of the boat, you know what you have to do" (BTW Rogers sees gold at $2000, that's one more). That's the contrarian side of my trading : when everybody forecasts an event, it is unlikely it occurs because it is already discounted in the current price . Maybe the recent jump of gold from 1030 to 1100 reflects that general anticipation of the increase of gold price and that could mean there's no room anymore for a further upside.
- Secondly, as I discussed recently regarding the short positions, in order to hold gold in the long run, one needs to be doubly right. Being long gold doesn't give me a coupon or a dividend : I'm not paid for the risk I'm taking (I even pay for it), it doesn't make sense in the long run... The other thing is as I'm building a position, I can't afford not to consider some "armageddon" scenarios forecasting the collapse of the derivatives contracts. In such a case, gold would probably be somewhere in the sky and USD near zero, I could be in the not so nice situation where I'll be very rich with my long position (that's nice) but only on paper (that's not nice) as the profits I would then have made won't be settled. That's why the best solution is then to avoid derivatives and ETF and buy physical gold and I have myself plenty of coins hidden in my garden. Once again, physical gold doesn't pay dividend and is costly to store (or to hide, I won't speak about the efforts I made to dig a hole in my garden).