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Politics : Welcome to Slider's Dugout

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From: SliderOnTheBlack	6/8/2007 8:05:24 AM
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Why gold's swoon? Very simple... About a month ago Rick Santelli appeared on CNBC and explained everything you need to know about this correction in both gold and the broad market. It was about a classic "discrepancy between price and risk." I'll try to dig up the exact date of Santelli's comments, but the just of his remarks were this: The markets (gold and the DOW/S&P) were pricing in very high expectations of the Fed cutting interest rates very soon... while the bond markets were pricing in very low to "no" expectations of the Fed cutting during 2007. This was one of the largest "discrepancies between price and risk" that we've seen in the market in some time. Trillions trump billions: The bond market is much, much larger than the equity market and in the end - the bond market will wag the equity dog. But, there's an underlying story to this story. And that story is about volatility. The VIX should not be thought of as a "volatility" index. It should be thought about as a "fear" index. And the price of fear just ramped. The story today is about Fear vs. Greed. We are in an environment where speculation and greed have ruled. On the individual investor side - margin interest presently exceeds the levels of the Tech & Internet Bubble of 2000. On the institutional side - derivatives had grown exponentially from levels that just a few years ago - were referred to as "a ticking time bomb." On the hedge fund side - the Yen carry trade is still alive & well...and hedge fund leverage is also at an all time high. The two keys looking forward are the Yen carry and derivatives. That July meeting of the BOJ is key. If Japan raises rates - given the ramp in the "fear" index...the sell off acceleratesas leverage will exit the markets at warp speed. The wild card - is that this ramp in volatility is occurring at a level 8 standard deviation and a blow up in derivatives is the rogue event always waiting in the wings. Time to make massive bets in either direction? Probably not. The price of going short via options has just exploded...so it's a lot more expensive to get short via puts than it was just a few weeks ago. Select shorts? Always… But, once again, the trade may be on volatility itself…not direction. And the trade on volatility for gold bugs has been and continues to be…this: TA can never be effectively used in a vacumn. It must always be weighed against the ongoing changes in underlying fundamentals and sentiment. This chart can not and will not go on forever. Later this weekend I should have some time and I'll explain why it has worked as long as it has. Right now... we've got rapidly deteriorating fundamentals and sentiment. When that happens, you need to stick with the trend even as it penetrates through the bottom of the trend line. If you're a buyer... tread easy and widen your buy in levels. Not a time to make massive bets. There's just too many unresolved issues... BOJ hikes, derivatives, Katrina Gap etc. More Sunday... Be safe out there. More zero's than hero's are made in times like these... this is an environment where you already needed to be positioned. The trade remains on volatility itself...not direction. More later...and think: Capital Preservation~ SOTB PS: This weekend... I'll tell you what I think is one of the very best...and very safest "buys" you can make in this market. Remember the Palladium & Silver move? This one is just as safe, just as cheap, just as "under-the-radar" and should be just as profitable!

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