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Sifting Through the Ashes
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Well, I was right about one thing, the moment of revelation was fast approaching. The direction of the move, however, caught me off guard. I admittedly believed that gold’s history of strong January closes would hold true again, since so much of the metal’s behavior over the past 5 months has been historically similar to prior breakout drives. Between an equity market that seems to be beginning to discount that things might not be as great as previously considered, and a Euro discounting the fact that certain member countries, my homeland in fact, may not be able to pay its debt, the metals suffered with most assets.
Interestingly, we seemed to have held at 1075. A large trading triangle could be forming with highs of 1225, 1163, and perhaps 1120 to come(??). This would set the stage for a defining moment. Traditionally, an upside break of a technical triangle, especially one that takes months to carve out with clear boundaries, is virtually perfect in its record of swift and sustained follow-through gains.
On the downside, there is 1075 obviously, as well as 1036, where gold’s unobstructed assent to 1225 began. There are some uptrend lines of importance that come in there as well so I would be optimistic that such a level might hold if tested. But that’s the risk.
For me, I am playing it pretty close to the belt, confident that an upside scenario would feature one of these “traders dreams,” this triangle situation. After getting a nice exit around 1115 once it was clear that my former thesis was invalidated, I have picked up a bit of exposure in the mid 1080s. The sale was painful to make, but necessary, as I refused to sign up for a week of daily nightmares…literally. The objective now is a sale around 1120, though I may punt some at 1102. All of this, again, in hopes of gaining some clarity on whether the metals are setting up for one more drive higher before correcting substantially in the Second Quarter consistent with durations of about 9 months for breakout drives (August-April roughly speaking).
Fundamentally, and longer-term, there are certainly reasons to expect a strong selling event, though still unclear if that has started already, or if it follows one more drive higher. Interest rates are set to rise in 2010 with sizeable bond supply set to hit the market, especially with the termination of the Fed’s agency purchases. China remains vulnerable to over speculation and potential liquidity reductions. Both of these events would likely be interpreted as gold negative at the outset.
Often times, like during the credit crisis, things suffer a knee jerk reaction that tends to be “wrong.” Bonds rallied sharply only to be sold off in earnest, and gold was dumped for liquidity by big funds, only to surge to new highs in a flight to quality trade. It is with this consideration that the astute participant is not surprised when events do not lead to the expected price action. A china slowdown, orderly or not, would certainly pressure most commodities as generally, China is a big buyer of such. A rise in interest rates would signal a potential end to the easiest of money. Rising real rates of interest, if that were to be the case, is most often gold negative as there is higher opportunity coast of holding an asset that does not pay interest. Looking further out on the spectrum, however, if the rise in rates were to surprise in the end on account of its magnitude, gold would experience an about-face at some point and perform rather well as the market struggled to find funding confident enough in the American currency/fiscal deficits. Ultimately, that is the greatest question out there. Will there be a disorderly rise in bond yields at some point? You know, they say bonds can’t be in a bubble, typical bubble rationalizations, because if you hold to maturity you get your money back. The flaw in the thinking is that it assumes the money’s value has not dropped precipitously. We will have to wait and see. The gruelingly slow nature of things almost assures us that there is much to occur between now and then. Right now, the fiscal position of our European neighbors is somehow making our 1.4 trillion dollar fiscal shortfall for 2010 look good.
John Cassimatis
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John Cassimatis has been managing his own capital for 14 years in various markets.
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