Last week was interesting. One that I would like to repeat with a little better patience. I have been saying since the beginning of the year that gold looked like a crowded traded, and I was going to wait for it to correct before increasing my position. Instead I bought another unit almost at the (interim) top. HGU tumbled terribly last week. Even worse, the US homebuilders performed very well, so both sides of my new trade moved against me (rather rapidly), causing a serious dent in my performance.
In fairness, it looked like a lot of trades were blowing up last week as margin calls were made and funds deleveraged. Commodities took the brunt of it, with oil, metals and the ags getting smashed. The yield curve flattened, even as yields on very short T-bills went to almost zero and TIPs yields moved positive again. In the equity markets, the indices were all over the place. In the end, SPX was up about 5% from its lows, while S&P/TSX was down, finally closing much of its perfomance gap with SPX.
I am remaining bearish on equities and positive on gold. The market is certainly far from its full bottom, and there is also little evidence that a short-term trading bottom has been formed. We still have not had a downside blow-out. The VIX jumped to 35 on Monday but it was very brief and rallied strongly from that level. Sentiment is poor but has yet to be seriously tested. There seem to be many people that assume that the bear stearns debacle marked a bottom and the markets are headed higher. This may be somewhat true but the upside seems rather limited. We are not going to have a 20% bear market rally when the market is only down 20% from its peak. In addition, the market has already rallied over 5% from the bottom. Not enough upside for my purposes i.e. the risk/reward looks terrible.
Gold miners, on the other hand, start to look attractive after a 12% fall in value over a few days though I am reluctant to increase my exposure there after last week. The agricultural equipment makers also look interesting after sharp declines on Thursday -- seems they have been caught up in the commodity price crash. But as I have said before, it is not necessary for whet prices to remain at $10 for these companies to perform very well. I will likely take a wait-and-see attitude this week, keeping an eye open for opportunities that may open up in the turbulence.
TRADES: SHORT EQUITIES (8 units); LONG GOLD vs. SHORT HOMEBUILDERS (2 units)
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2 comments:
CDN, here some thoughts I have re gold and other commodity exposure. My line goes like this:
An EUR based investor observes a lot of USD assets streaming into gold, in an effort to escape the weakening dollar (and also looking for a safe haven from the credit crisis). He decides to jump on the wagon in good belief that he is partially hedged vs the fx risk of holding an asset that is priced in USD (like gold), as any weakening of the USD will be reflected in the price of gold (and vice versa). This has work pretty fine so far (i.e. even though the return in EUR was less than in USD).
Where I see a component of risk that troubles me, is in the following case: if the view re USD changes and it starts to strengthen vs the EUR (for whatever reason, be it interest rates etc). Now the original dollar based investors, start to unwind their positions in the precious metal, forcing other holders to sell as well (e.g. due to margin calls, profit taking or plain fear). This whole causes the gold price to dive further and faster than justified by the new exchange rate. And this hurts actually both (the USD and the EUR based investor as well). Of course it also presents an opportunity.
Any thoughts on this?
MP, sorry for delay in reply (if you happen to still read this).
You may be right, which is why I am not jumping to increase my gold position here. Mark Faber had an interesting chart in this month's commentary, showing how gold plummeted in 73/74 bear market before screaming higher over next 5 years. We are probably in the midst of a long-term bull market for gold, but that does not mean it is straight up. The level of bullishness still seems a little high for my liking. I am not selling, but I am holding off for better prices for now.
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