Tuesday, January 20, 2009

Gold Good for the short?


I've never been big on following gold, however the past few days I've been noticing the headlines have been quite repetitive like the one above. Obviously with crisis the traditional explanation you will have flight to quality to some safer security. Which is also interesting, arguments of inflation also seem to push gold prices higher. It seems we will always have some justification for gold. At this point, how much of this is speculation? All things considered, if fundamentals of the economy were certainly the cause of gold performing extremely well in 2008, then one should expect the same in upward trend for gold in 2009 as economic condition are not expected to get any better this year.

Correlated to gold:

as stated by David Moore, chief commodity strategist at Commonwealth Bank of Australia. "Gold is influenced by the U.S. dollar making ground against the euro,''

If this correlation certainly holds true for the first quarter, I would have to be short on gold prices as all my bets are short the dollar and long on its pairs (Eur, GBP, AUD, CAD... though the GBP short term is looking worrying, will have to discuss that later).

If I really do expect the dollar to weaken by the end of the first quarter, then I should as well certainly short for gold.

The bullish Argument for Gold:
1. Weak economies
2. Poor sentiment
3. *Treasuries/Bonds become less attractive.
4. Continued upward trend

*I would like to note, I've noticed in an article that many funds are not taking investors money for new investments as the Funds cannot make profits on treasury/bond related funds. Some are even struggling to maintain positive yields.

Scenario for Bears:

In order for a short in gold to happen, I would have to hope that the correlation between gold and the dollar is very strong, and that there is no other exogenous factor that would float the prices of gold.

Technical analysis is still strong in my opinion for the dollar to weaken, I think that the reason the dollar is doing so well currently is to due the relative health of other economies. First many of the Problems originated from America and only showed up later in other economies. Since I do not believe there to be any significant changes in the US economy, we may see a reversion of poor sentiment on the US economy and other economies will instead look relatively better.

Since it hard to see the full picture since the Media can be biased, this argument heavily relies on the technical analysis of currencies and correlation holding true...

Also it is possible contrarian perspective may work here as there maybe too much bullishness going into gold, after all where does the real value of gold lie?

we will see in about 2 months time how terribly wrong I was or how terribly right I was...


Gold Price: 828.7 off bloomberg
EUR/USD: 1.29615 4:38 AM off FXCM
GBP/USD: 1.39.7 4:38 AM off FXCM
USD/CAD: 1.19231 4:38 AM off FXCM
AUD/USD: 0.66371 4:38 AM off FXCM



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