Trading Volatility, Ballasted by Gold

[romans holiday]

 

 

Continued correction to around 1300 looks likely. The trend line is near bang on 20% yearly appreciation against the US dollar.

[jerpy]

I'm going to start posting a bit more here on gold. What I find about the main gold thread is the lack of "context"... or the differentiation between short and long term calls on gold. A year ago when gold was at 1100, some thought, in the short term, it would correct/ consolidate back below a 1000, others thought it would blast up to 1400. In the medium/ long term near everyone [on the gold thread] was thinking it would head to 1400 and above.... myself included [i should admit that a year ago I didn't think gold would strengthen quite at the pace it has....I was labouring under the illusion of the long term trend on the linear chart.... duh].

 

And yet now a year later when gold has finally hit 1400, certain "gold bugs" think they were "right"... and presumably others were wrong. The reality is all were wrong and all were right; all were wrong in the short term because gold neither corrected to below 1000 nor did it explode up to 1400.... it tracked a middle course between these two extremes. All were right in the medium/ long term with gold finally arriving at 1400.... which was never in dispute.

 

Noticed the somewhat contrasting opinions on this debate and decided to keep out on the gold thread. Just simply beats me why anyone(not directed at you personally), who is long term bullish, should get all wound up over such short timescale's. For unless you are trading, it's kind of irrelevant.

 

Wonder if the atmosphere got strained just because it started to fallback? Either way do flag up the dips, love sale shopping

[romans holiday]

Noticed the somewhat contrasting opinions on this debate and decided to keep out on the gold thread. Just simply beats me why anyone(not directed at you personally), who is long term bullish, should get all wound up over such short timescale's. For unless you are trading, it's kind of irrelevant.

 

Wonder if the atmosphere got strained just because it started to fallback? Either way do flag up the dips, love sale shopping

That's an interesting issue you raise. As you know I'm not a conventional hyper-inflationist... and at the moment that seems to be the main narrative people have for buying gold. Any criticism of hyper-inflation is not to be tolerated.

 

Here's a possible scenario... gold rises, but not as fast as the hyper-inflationists expect... and yet fast enough for non-hyper-inflationists to suspect it's in a bubble. Then instead of blasting through to the upside, gold turns and corrects for a period. It woud seem that hyper-inflation is not playing out, and those thinking of buying gold probably won't..... some that did could well sell. Some of those that thought they were riding a bubble may also sell.

 

The problem here is the simple idea of hyper-inflation [often taken as a dogma by "gold bugs"]. If one looked at the long term log chart it looks to be falsifying hyper-inflation theory.... gold is only appreciating against the dollar at 20%.... with smaller corrections and less volatility along the way. This chart also predicts gold will not explode to the upside / to 1650 by January, and may well continue to correct to 1300.

 

When these facts are pointed out on the main gold thread I may as well kick a hornets nest [highs and lows in gold are often correlated with the gold bug's temperament.... way too much emotion]. What the gold bugs want is edification of certain dogmas not an open discussion of theories, facts, and possibilities. The irony is what I'm saying is very bullish for gold... with this area a reasonable place to buy. I'm providing an alternative narrative for explaining why gold is not exploding upwards to Sinclair's target, yet also why it will not correct too much. The main idea - gold being re-monetized into an international currency.

 

In short, what's relevant for the short/ medium and long term of gold is the pace of appreciation, and then an objective justification/ reason for buying it.

 

 

It's a shame a civil conversation can't be had on the main gold thread over this kind of fundamental stuff as, in the past, I've learnt a few things from gold bugs... primary among which is the need for a log chart. Perhaps this is what sparked my interest in "money illusion" around mid-year [a linear chart takes the money unit as central... the essence of money illusion] after which it became so obvious on the need for a log chart. I kick myself now... looking at the earlier charts here.

[romans holiday]

A few months back I discussed macro-economics with a colleague I share an office with. I must have mentioned VXX among other things because now I receive an excited text confessing he had bought VXX at 20.... and that now the price is 46 [in real terms, in terms of his purchase price, it's down to 11 odd]. He's wondering whether to sell for a profit. Oh dear.... my and my big fat mouth.

 

Apparently, he put quite a bit of money into it [10% of his savings].

 

Any advice would be appreciated here. Should he hold onto his position, or sell at a loss? I'm thinking, of the cuff, he should sell half and keep half... in order to salvage the situation/ minimize the damage??? Or even better, sell the whole lot as the market corrects here... if he sells at 50 or 60 [in relative terms he bought at 80] he'd be minimizing his losses.... as it could just head down further.

 

btw... I advised him at the time to just buy gold.

Right... thought about this. I'm going to advise him to sell all his VXX... even at a loss and buy gold.

 

That way, at least he'll have a good chance of making good that loss.

 

[i don't really like giving "advice", and never advised him to buy VXX... but feel a bit responsible for his loss in this case... even though he is very cool about it. I still think he doesn't realize there's a fair chance he could lose the other half of his money]

[romans holiday]

Silver at 20 could be a good trade/ buy [already corrected a third of the way]. In the grander scheme of things it's appreciating around 25% yearly against the dollar. But then if the '06 spike is anything to go by, it may track sideways for a bit.

 

 

[romans holiday]

A closer look.

 

 

[littledavesab]

Right... thought about this. I'm going to advise him to sell all his VXX... even at a loss and buy gold.

 

That way, at least he'll have a good chance of making good that loss.

 

[i don't really like giving "advice", and never advised him to buy VXX... but feel a bit responsible for his loss in this case... even though he is very cool about it. I still think he doesn't realize there's a fair chance he could lose the other half of his money]

 

When you first raised the idea of VXX I found this intriguing as a possible hedge against a stock portfolio – being a hedge that might not be always heading in the opposite direction. Its one of those things where it was better to sit on ones hands and watch and wait rather than jumping in. Unless I am missing a trick the watching and waiting does seem to demonstrate that the VXX is for short term traders with accurate timing. A better hedge for a stock portfolio might be a simple inverse ETF.

 

Know what you mean about giving advice. But the exit of the VXX trade would seem sensible right now, it just doesn’t seem to do what it says on the tin! Questions for your friend might be – does he simply want to buy and hold, does he want to watch the market actively and trade? If the former then buying gold would be one way to go.

 

 

 

[romans holiday]

When you first raised the idea of VXX I found this intriguing as a possible hedge against a stock portfolio – being a hedge that might not be always heading in the opposite direction. Its one of those things where it was better to sit on ones hands and watch and wait rather than jumping in. Unless I am missing a trick the watching and waiting does seem to demonstrate that the VXX is for short term traders with accurate timing. A better hedge for a stock portfolio might be a simple inverse ETF.

Exactly! I first got interested in VXX as a position trade... something to stake out and sit in for a while, while waiting for volatility. But as the nature of the instrument suggested, and as others have pointed out [and we've all observed] this is not the right vehicle for that.... if you buy it, it would be all about the timing... and that is a very difficult game.

 

Know what you mean about giving advice. But the exit of the VXX trade would seem sensible right now, it just doesn’t seem to do what it says on the tin! Questions for your friend might be – does he simply want to buy and hold, does he want to watch the market actively and trade? If the former then buying gold would be one way to go.

Thanks Dave, yeah he's not very sophisticated, and basically wants to sit in something. It seems he still has it in his noggin that VXX is a good position to sit in. It won't take much to dispell this, and get him to put the salvaged amount to work in gold... he's already bought a little gold.

[romans holiday]

But the exit of the VXX trade would seem sensible right now, it just doesn’t seem to do what it says on the tin!

In 2 months he's lost 50%

 

Time for "Operation Apollo 11":

 

 

1] Exit VXX immediately

2] Sit in dollars and wait for silver to correct

3] Buy silver [when gold/ silver ratio 60-70]

4] Sit in silver, and let it "catapult" him to gold

5] Swap silver for gold when ratio around 50

6] Sit in gold... situation recovered.

[jerpy]

In 2 months he's lost 50%

 

Time for "Operation Apollo 11":

 

 

1] Exit VXX immediately

 

2] Sit in dollars and wait for silver to correct

3] Buy silver [when gold/ silver ratio 60-70]

4] Sit in silver, and let it "catapult" him to gold

5] Swap silver for gold when ratio around 50

6] Sit in gold... situation recovered.

 

Ah now would that be very similar to R.H's crystal ball trading strategy too? Why move all at 50? Could you not see G/S ratio going below this level, or is that just a comfortable swap marker?

[romans holiday]

Ah now would that be very similar to R.H's crystal ball trading strategy too? Why move all at 50? Could you not see G/S ratio going below this level, or is that just a comfortable swap marker?

VXX has gone down from his "80" to near around 44, and has here bounced to 47. Super speculative for him to stay in it. Sitting in either dollars, silver or gold would be better.... unless you expect the E market to do a wobbly here.

 

I don't think the ratio is going below 50 for now... looks like the worm has turned.

[Perishabull]

VXX has gone down from his "80" to near around 44, and has here bounced to 47. Super speculative for him to stay in it. Sitting in either dollars, silver or gold would be better.... unless you expect the E market to do a wobbly here.

 

I don't think the ratio is going below 50 for now... looks like the worm has turned.

 

 

I posted this a while back;

 

You'll get killed holding that for any length of time

 

VXX Marches Towards Zero, Is VIX Heading Back to 25?

 

 

Why VXX Is a Bad Play

 

 

 

Early Performance Indicates VXX Is a Horrible Volatility Product

 

 

 

But don't take my word for it

 

I suspect that VXX is the equivalent of UNG for natural gas. UNG is basically a vehicle to extract as many $$$ out of unsuspecting retail traders as possible who simply do not understand how it works.

 

The following chart tells you all you need to know, it is VXX divided by the actual VIX, the ratio of VXX to VIX over time, it's going lower - fast

 

 

It's a very expensive way to hedge

[romans holiday]

I posted this a while back;

Yes, thanks for that P. Both yourself and litteldavesab gave early warning about the instrument when we first started looking at it [time decay]. I never bought it, deciding it was no good for a position trade. With the entropic pattern it shows over time, the timing of the buy is essential... you'd only look to buy it if you were relatively certain the market was about to crash.... hugely speculative and I'm a cr$p timer. Fundamentals, core holding and perhaps position trading I see as my strengths.

 

Problem is that back when I first started looking at VXX, I mentioned it to a colleague... who must've suddenly seen dollars signs and ran out and bought it. He only "confessed" to buying it a few days ago [i'd warned him off it and into gold] because he thought he'd made a fortune... with the new nominal share price at 40.

 

Edit: a lot seems to hinge on QE announcements. I missed the huge move up in silver [this is my main trade on volatility as it's an easy one to make dollars for silver and vice-versa] because I bet on Bernanke coming out with less... disappointing markets where QE had been "priced in"... well, he went for it, but is now paying the price. Looks like the Fed is being squeezed politically [internationally and domestically], which means that continued QE may no longer support assets prices... and the bears might get their market crash after all.

[romans holiday]

Sub 17.90 silver still not beyond the realm of possibility.

 

 

[romans holiday]

Silver has shown how volatile she is both to the up and down side.

 

I'm thinking AGQ [Leveraged Silver ETF] could be the instrument to leverage later volatility.

 

First looking to see a very good solid correction before putting on a reasonably sized trade.

[romans holiday]

Ah now would that be very similar to R.H's crystal ball trading strategy too? Why move all at 50? Could you not see G/S ratio going below this level, or is that just a comfortable swap marker?

Depends how conservative or speculative you want to be. 50 would be a marker between these perhaps?

[romans holiday]

3 year cycle in silver?

 

Previous cycles saw silver go from:

 

$7 to $20... before correcting

then $10 to near $30... before correcting

the next could see silver go from $18 odd to $54 or so.....

 

Won't look at buying silver until well into next year.

 

 

[jerpy]

Silver has shown how volatile she is both to the up and down side.

 

I'm thinking AGQ [Leveraged Silver ETF] could be the instrument to leverage later volatility.

 

First looking to see a very good solid correction before putting on a reasonably sized trade.

 

Funny i'm thinking AGQ (the stock) would be my next Silver buy, actually bought a few recent, but chickened out for beer money profits. Set a new target of low 20's (as ever reserve my right to change my mind ). Expecting production may offset some silver price weakness-but other factors to consider too there.

 

Good point on Silver cycle charts, holding back myself for the time being, as switched emphasis bar odd coins for kids.

[jerpy]

Funny i'm thinking AGQ (the stock) would be my next Silver buy, actually bought a few recent, but chickened out for beer money profits. Set a new target of low 20's (as ever reserve my right to change my mind ). Expecting production may offset some silver price weakness-but other factors to consider too there.

 

Hi Roman, having flagged it here, hope you don't mind me commenting on your thread.

 

Yet again a stock i've really fancied, I seem to have taken profits far too soon, as the bear inside me has got the better of my trading instinct.

 

Where was my silver pull-back, that dragged all silver stocks mercilessly back down

 

So much for my low 20's as AGQ goes setting sail into the mid 30's a week or so later

[romans holiday]

Hi Roman, having flagged it here, hope you don't mind me commenting on your thread.

 

Yet again a stock i've really fancied, I seem to have taken profits far too soon, as the bear inside me has got the better of my trading instinct.

 

Where was my silver pull-back, that dragged all silver stocks mercilessly back down

 

So much for my low 20's as AGQ goes setting sail into the mid 30's a week or so later

Crikey, what's your time frame for trading? One week?

 

The only trading I'm interested in is medium term "position" trading. I wouldn't be surprised to see silver meander around at these levels for six months or so. If you look at the long term chart above it was in the 17-20 range for quite some time before the correction [which would equate with the 25-30 range now].

 

My silver/dollar trade is also my dollar hedge [against 60% core holding in bullion]. My core in bullion has done well these last few years.... and am hoping to re-balance it with a dollar/ silver trade in the near future [no need then to sell core bullion]. If I get the volatility in silver right just once it should be enough to keep up with the appreciation in core bullion. The position trade can be a relatively large one because I think the risk is limited in going from the reserve currency to silver, and back again... less risk than buying and sitting in stocks imo.

 

I don't really see dollars as utterly contrary to gold, but see gold and dollars as both prime forms of liquidity... though gold is the more prime imo reflected in an appreciation of 20% annually against the dollar.

 

If/ when the sell-off in stocks comes, I'd buy silver/ gold stocks and consider them core.

[jerpy]

Crikey, what's your time frame for trading? One week?

 

I don't really see dollars as utterly contrary to gold, but see gold and dollars as both prime forms of liquidity... though gold is the more prime imo reflected in an appreciation of 20% annually against the dollar.

 

TWO

 

More rue the fact i've chalked up a profit, but left too much behind, but hey,ho profit is a profit and all that.

 

Good day to express that sentiment, currently see the dollar strong and gold still up today (please note time of post as these things change quickly )

 

[romans holiday]

A closer look at a possible 3 year cycle in silver.

 

I wonder if we might see another round of deleveraging next year with Europe the likely catalyst. Last time silver halved from 20 to 10. This time round there's a good chance of silver halving from 30 to 15 odd [i may look to buy at 17.90.... which was where I sold... missing half this recent up-leg]. From 15 odd, if the cycle held, silver could then well move up to $45 over the following 2 years.

 

I'd look to pile into silver with a large part of my dollar reserves... then sell at around 40 odd [this would serve to rebalance cash against bullion] . As mentioned, I'd consider the 2X leveraged ETF AGQ.... double the performance and without the holding costs.

 

 

[romans holiday]

The Euro's looking increasingly wobbly, and it doesn't take much to surmise which other currency is likely to benefit from capital flight. With the dollar now strengthening against other currencies, Volker comes out with a well timed message to talk the dollar down. The monetarists in the White House must be sweating bullets faced with the possibility of a US economy crucified on a strong dollar.

 

What seemed so unlikely a while back, given all the bravado over QE, is now burgeoning into a real possibility; economic developments in sovereign bond markets and political developments at home have to be causing the economists to rethink their comforting dogmas.

 

 

 

Volcker Says Dollar's Role in Danger as U.S. Influence Declines Globally

 

http://www.bloomberg.com/news/2010-12-01/v...e-declines.html

Former Federal Reserve Chairman Paul Volcker, who is chairman of President Barack Obama’s Economic Recovery Advisory Board, said the U.S. dollar is in danger of losing its role as a global benchmark currency.

 

“The growing question is whether the exceptional role of the dollar can be maintained,” Volcker told a gathering of New York civic leaders at the University Club of New York last night.

 

The decline of the U.S. economy, political gridlock at home, U.S. involvement in two wars and “festering” geopolitical issues in the Middle East and Asia have undermined the ability of the U.S. to influence global events, Volcker said.

 

Volcker offered no prescriptive solutions as he spoke in broad terms of the country’s loss of stature.

 

“This is a troubling time for America, a troubling time for the world,” Volcker said in remarks to Common Cause, a civic group. He said the U.S. is facing its most difficult economic crisis since World War II. “If ever there were a need for clear-headed, confident leadership, nationally and internationally, that time is now.”

[romans holiday]

Yields on the 10 year treasury are starting to look interesting.

 

I good contrarian trade might be to buy an ETF when the yield gets to 4% or so [now 3.3]. When/ if this latest leg of reflation fails, the yield could easily retrace back below 2.5.

 

IEF, the ETF ishares Barclay's Treasury Bond Fund, could be a useful instrument for this. It's dropping like a stone at the moment, down from 99 to 93.

 

For the more adventurous, check out TYD [Direxion 10-Year Treasury Bull 3X - Triple-Leveraged ETF].... down from 68 to 56.

[romans holiday]

Here's what I'm looking for in my next silver trade. Buy around 17.90 and sell at 54. May take a six month wait and then a couple of years sitting.