Bernanke: From blink, to bluff, to blunder.
1. What was the main catalyst, or cause of this explosive move in gold and gold stocks?
Two weeks prior to the Dec. 11th Fed meeting, Goldman issued their “short gold” call.
At the time, both gold and gold stocks were screaming inflation at the top of their lungs.
Gold had exploded, and was sitting atop a near $200 breakout. And the HUI gold stock index was on fire… up a scorching 179 index points in the last 90 days. Both were in strong, powerful, bullish uptrends:
So what to do?
-- Ignore their call and hold tight?
-- Heed it and dump gold (knowing that’s what they wanted)?
-- Or, go against the grain and buy more?
Well job #1 was to invoke rule #1 as it applies to all things Goldman.
“Do as they do -- not as they say.”
The second thing to do, was to think two trades ahead. To skate to where the puck was going to be… not to where it was.
How to protect gains, how profit on the pullback, and how and when to turn long – after GS got the shakeout they were looking for?
The first part of the trade was to take some chips off the table and to set tight stops. The second part of the trade was to add some puts to serve as insurance, and as a trade on the coming pullback. The third part of the trade was to target a technical bottom where I felt strong buying would come back in – given present fundamentals stayed intact. And that was the HUI 370 level.
HUI 370 had been long term resistance and technically – for gold stocks to remain in their bull trend – needed to now become support.
So we targeted HUI 370 as the level that we would begin to cover and cash in our puts and begin to then “sell” puts for premium, to discount and soften our re-entry at 370.
And wouldn’t you know it… the Fed only cut .25 bp… the market was disappointed and sold off broadly – taking gold and gold stocks down with it.
…ya’ think Goldman knew the Fed was only going .25bp?
And here’s what happened after the disappointing .25bp Fed cut.
HUI 370 held…and surprise, surprise… “someone” large and in charge – came in
and bought gold and gold stocks in size….and gold turned on a dime.
-- Someone didn’t want the canary in the coal mine screaming too loudly.
-- Someone wanted and needed gold’s rally squashed.
-- Someone didn’t want gold getting away from them.
-- And someone wanted to get back in – cheap….because someone knew…
…that Bernanke had blinked, bluffed and was now cornered. He had two choices. Let inflation run, or save the economy (and perhaps the financial system).
Aw hell, what’s a little more hedonic magic?
Easy decision… lie a little more about inflation…and save the economy.
…it is an election year after all.
-- Bush is now talking about a stimulus package.
-- Former Fed governer Wayne Angel is calling for an immediate 100 bps. cut.
-- Bill Gross is calling for a 3% Fed Funds rate.
-- The media is using the “R” word.
-- Politico’s are calling for a tax cut, rebates and for the helicopters to launch immediately.
…ya’ think Goldman knew that was coming?
2. What “forward looking” message can you take away from this move in gold?
In my opinion, the strongest message is – that this wasn’t your ordinary garden variety – gold bugs & speculators rally. This was a well orchestrated shakeout into very strong fundamentals for gold, and the post-shakeout rally was created by strong, high volume institutional buying, with institutional favorites like Barrick leading the way.
…that’s different. Very different.
And it speaks volumes…about the future, and to the choice that Bernanke, the Fed and the Treasury have made. And that choice is to rescue the financial system to the best of their ability, to prop up the financial markets at any cost…and to stimulate the U.S. economy in a Presidential election year.
Bernanke & Paulsen’s LIE formula will continue…
Liquidity + market Intervention + Exports (via a weak dollar) = Value and Direction of Markets.
The Fed has no choice but to continue to inflate… and let’s hold off on the ultimate inflation/deflation debate for now… because “for now” it’s an intellectual exercise…and not an immediate “money” trade.
3. Did you see anything unusual, contradictory, or confusing in this move? … if so – what?
The most interesting thing to me – was Goldman leading the “shakeout” and quieting gold, just prior to the Fed meeting. Goldman always carries a lot of gravitas in the market…but, after what they did to their clients in the natural gas meltdown two years ago, and after they turned on their clients once again, placing a massive short trade on all things subprime (directly off former Goldman CEO/Treas. Sec. Paulsen’s assurances that all was fine)… they carry more weight than ever. And I think traders heeded Goldman’s short call on gold half out of fear, and half out of confusion.
4. What trading/investing opportunities either near term, or longterm, do you see developing out of recent events?
The inflation/deflation debate will continue…and I believe some compelling “discrepancy between price and risk” trades will develop based on that debate.
The debate over whether gold will trade as a commodity and be exposed to softness during recession, or whether it will trade as a flight to safety currency and be immune to commodity corrections – will also present trading opportunities.
And this is where I think “my mindset” as a trader differs from many.
I do not care about the intellectual correctness of any debate. I care about “discrepancies between price and risk.”
The money will be made by betting against either side, whenever they carry the trade to the extreme side of price vs. risk… right, or wrong.
The hardest thing to do in trading… is to do nothing – when no compelling discrepancy exists between price and risk. When we find ourselves in long, rolling trading ranges. Sometimes – that’s the trade.
Right now… the BOE meets Thursday. I want to see what they do. I want to see how this push for a stimulus package develops. And I want to see if Bernanke’s commits his final blunder and cuts .50bp…maybe even Angel’s 100 bp. If that happens… you, Goldman, and all those institutional buyers of Barrick gold know what’s going to happen to gold and gold stocks…
An assault on $1,000 gold and HUI 550+.
Until then… we navigate through the fog by our instruments…
Old resistance has now become new support. And old highs have now become new resistance.
…sound familiar?
So how to trade it?
Well, personally… given all this heavy volume institutional buying… I figure “someone” knows more than I do about what the Fed is about to do, about Bush’s stimulus package, and about coming Fed/Treasury policy. As such… I think a fuse is about to be lit under gold… so I don’t want to be out. But, yet… I don’t want to give anything significant back should oil suddenly rollover on recession fears, and take gold down with it.
…so, how do you do that?
Well, you sell into strength – always. Which I have. And when I take some chips off the table into strength, I always take a small portion of those chips and buy some deep out of the money calls either right then and there, or on the next resulting pullback.
I also pull my stops up tighter…now back in that HUI 420 range… and if 420 is penetrated, I’ll add some puts as both insurance to what I still hold long, and as a trade…on a retest of HUI 370 support.
My goal is to be fully hedged and not give anything back sub HUI 420. If fundamentals remain positive, given the rich option premiums created by all this volatility – then I’ll start my re-entry buys by selling puts for income and to discount my re-entry buys.
By hedging myself here and refusing to give anything back sub HUI 420 – I am perfectly positioned if we enter a new consolidation trading range – which now looks to be from 370 support to 460 resistance.
Lastly, I have some leveraged upside from the calls I bought when I took profits into strength… and I have no problem in making a technical re-entry on the breakout through HUI 460 resistance.
The risk here is that the Fed does not deliver as expected, and that oil collapses and traders take down commodities on recession fears…and gold follows.
That’s a dynamic trade… there will either be a point at which the trade is over done and a discrepancy exists between price and risk… or, it doesn’t.
Right here, right now… the next major move for gold and gold stocks hinges on the Fed taking the Fed Funds rate down to 3%ish and cutting .50 bp here.
If Bernanke cuts .50 bp… we’re off to the races. If he disappoints, if oil collapses, and if the fears of recession take down commodities … do NOT get caught hanging out in the wind, long , naked and unprotected.
Once again… the big, easy and fast money was off the washout, forced selling bottom in August , to this run back to resistance at HUI 450-460. Hopefully that’s safely in the bank. We got another 60-70 points off of “backing up the truck” into this shakeout off of the Goldman “short gold” trade.
… that’s gravy… icing on the cake. Treat it as such.
There are two things to be positioned for here:
1. To not give it all back.
2. The break through HUI 460 resistance and the next upleg of this cycle, which I think takes gold on a test of triple digits and gold stocks to HUI 550.
And you ain’t gonna get there if you don’t have a plan.
So if you don’t have one -- get one, because I think Mr. Bernanke is going to go from blink, to bluff to one hellacious blunder.
Mo later,
SliderOnTheBlack |
