Tag Archives: gold

The Only Gold Trade I Will Ever Do

There is only one trade in gold. It’s not to buy gold; it’s not to sell gold. It’s to hold gold and never sell it.

The easiest trade in the world is to be long gold. It’s a near-parabolic market that is going straight up with every possible bit of fundamental, technical and psychological momentum behind it.

Let’s start with the fundamental:

Point #1 – There is a bear market in paper money.

One currency at a time, the belief in the infallibility of paper money has eroded.

Point #2 – Debt is out of control

The most trusted currencies in the world — the U.S. dollar, euro and yen – are produced by regions that are falling into a debt trap. Perhaps with tax reform, austerity and a great deal of suffering the situation may be brought under control… but we doubt it.

Point #3 – Inflation is the only way out

We are the dawn of the next great bubble. The bubble in ultra-low borrowing costs. Japan has been here for 20 years so there is no saying how long it could go for. The dynamic for the three year horizon is low rates and low growth. Central bankers believe they will be able to raise rates to curb inflation. But with low growth likely to persist the pressure to ignore the warning signs will be too much.

Point #4 – Emerging market growth will push commodity prices higher

The proliferation of information technology via the internet will bring liberal democracy and good government to the world. This has created a secular bull market in the emerging world that will last at least 100 years. This growth will trigger a commodity-price shock, and spark the inflation that will send gold higher.

Point #5 – People in emerging markets don’t trust their governments

The United States used the gold standard for more than 150 years. Why? Because it takes people a long time to develop trust in their governments and institutions. How long until the people of Argentina forget that their currency was devalued 66% overnight in 2001? In the emerging world, as people accumulate wealth, they will be drawn to gold. The US dollar used to meet this need but it has fallen from grace.

Point #6 – We are on the precipice of a currency war. The only question is how messy the war will get. There are no easy solutions for the low-growth trap in the developed world but elected leaders are short-sighted and currency devaluation is a much better election platform than a decade of austerity.

When others talk about gold fundamentals they talk about central bank buying and supply/demand issues. In the one-month horizon these are important factors. But the points we have made here are extraordinarily powerful and, for us, gold is not a one-month trade but a bull market that has lasted 10 years and will last another 10, at least.

Now let’s talk about technicals.

Someone told me a long time ago that technicals don’t work on gold. After years of trading it and watching the charts, I have to agree. It’s just a different kind of market. Maybe there’s some other kind of metric that better captures support and resistance but I haven’t seen it.

But if I must, here’s the monthly chart I watch. A break of that support line might make me nervous.

Now go back and look at that chart again. Study it. Feel it. If you look at that chart and worry, you’re on a different planet than me. It has done nothing but climb higher and higher. Show us another chart like this and we’ll buy it. We don’t even need to know the fundamentals.

This is where the psychology comes in. A 10-year bull market takes on a life of its own. If you’ve read this far, you have thought about buying gold. Maybe you’re telling yourself that you will wait until $1500 or $1200. Good luck. If it falls that far, know that we will be buying all the way down.

But since you have read this far, I can tell you something for sure: you will buy gold. The fundamentals listed here are convincing, real and they will persist as long as you live. Those who are waiting now will be chasing later.

I say all this knowing that one day, it will end in tears. Parabolic rises always do. But gold has just barely started to go parabolic. But decade long parabolic rises don’t end with a whimper, they end spectacularly, something akin to a $300 rally that reverses by late afternoon.

The rally doesn’t end here. It doesn’t end with a high of $1921. So for the most nervous gold bulls, don’t listed to anyone who talks numbers in gold… $1200, $1700, $2300, the fundamentals are all the same. But the big numbers matter and a number like $2000 is too magnetic. No market ever comes this close to such a monumental number and fails to hit it.

So don’t put your life savings in gold. But don’t ever be short and don’t ever be flat. It feels much better to be long. That’s the psychology of the gold market.

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$1728 Is Key for Gold

Our belief is that the two-day selloff in gold is the result of a harsh correction compounded by a leaked CME report. Gold is down $170 from Tuesday’s record high of $1912/oz.

 

Gold weekly

We think this may provide another excellent buying opportunity for gold but in order for us to buy here we want to be confident there will be no weekly close below $1728. A close below that level would create a bearish engulfing candle on the weekly chart and point to a fall toward $1500.

 

We will be ready to add to our gold longs in our retirement account on Friday if it looks like gold will close above $1728. If not, we will be ready to hold on for the ride and buy more when it’s cheaper.

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The Dysfunction in Washington

Many commentators and strategists are fascinated by politics. They over-evaluate decisions that will never make a pip of difference in the forex market. I steer clear of this sort of self-indulgent political pontificating because so often it morphs into a platform for whatever the strategists believes rather than what’s important to the market. At other times, the impacts will be so far off into the distance that any forex benefit will be so gradual that it’s negligible.

 

Other times, like now, even the most anti-political strategists have to give up on every other part of the market and focus on nothing but politics. The debt ceiling debate in Washington is a game-changer. Hopes for a long-term, comprehensive solution were dashed on Friday as it became abundantly clear that the Obama and the Republican-controlled House cannot work together.

 

Instead, the best hope now is to raise the debt ceiling high enough to get through the 2012 election. S&P warned that a short-term fix while piling on more debt and pushing problems down the road may lead to a downgrade.

 

When markets open on Monday, the dollar will fall as that threat inches toward reality. The US may avoid a downgrade for a year or two but it’s now inevitable. The enormous debt load combined with looming entitlements and zero appetite for tax hikes has cornered the United States. The economy is trapped in zero growth cycle that will last 10 years and Washington has neither the will nor the means to stop it.

 

The implications are obvious. The US dollar will fall and hard assets will soar. Gold going to $2000 in the near future is so obvious that it’s barely worth mentioning. The currencies that rise most against the USD will be those most tied to hard assets and least tied to US growth. The Asian, Antipodean, South American and Nordic currencies are set for a half-century of appreciation. This too was once set to be a slow, gradual climb but dysfunction like we’re seeing in Washington right now will speed up the process.

 

Our trade anticipating the fallout in Washington was initiated on Tuesday. We anticipated the problems that arose on Friday would arise earlier in the week. We entered a short USD/JPY trade at 79.21 (+69 pips) now and added to it at 78.45 (-6 pips). We will take profit on the first unit at 78.00. Our stops are at 79.00. Our trades are live if you follow on Twitter @FX_Button.

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