Call Me a Turkey!

Wow, finally finding some quiet time on a holiday weekend to get a post in. My life has been very busy and equally stressful as of late. My wife and I will be welcoming our 2nd daughter into the world on the 13th (via c-section), then closing on a house purchase the 22nd, possibly the 18th depending on how things go. Then there will be prepping, painting, carpet installation, and finally moving. We'll make it though!

In my last post I shared my view that Turkey looked like a good longer term investment. I was wrong. I was right in my analysis of tangible returns in interest rates and the potential for a carry trade, but I did not place enough focus on Turkey's central bank governor. The problem with the Lira carry is that foreign money is not welcome in Turkey. This is why even in an environment of accelerating inflation in Turkey, interest rates are being kept artificially low and bank reserve capital requirements remain high. Furthermore, the Turkish central bank is selling Lira daily to buy dollars. This government order flow has significantly devalued the Lira over the last month. The bottom line is that until leadership changes in Turkey, trading the Lira either direction is a bad bet. I'm out at break even and I've shifted my attention to other, more stable markets.

Whenever you are researching possible trades and developing trends, always be sure you know the political risks to your trade--they can be enormous even when everything else about the trade looks great.

As of the 15th, I won't be allowed to leverage up on my gold positions, dang it. Right when the gold market is about to blow up I'll have to settle for market returns. I'll be mixing in floating profits all the way down though. $500 is where gold is headed. Now that gold is falling sharply and US equities had one of their most bullish weeks in two years, the gold apocalypse is upon us.

I'm also bullish the Euro right now, I still think we'll see 1.5 here in the next couple of months. I don't put too much weight on technicals anymore, but the giant bull flag in EU looks to be breaking out and so I took a small bet on EU. Interest rates are on my side, the Greece situation is settling down, and I have no doubt that money will flow from gold into the EU. It's just a game of putting the pieces of the puzzle together.

Recently I've also been buying the Aussie. Yes, even though AUS is correlated with gold. I'm targeting 1.1. At that point in time I believe the falling gold prices will make 1.1 a longer term high in AUSUSD.

Take care everyone and trade well.

Oh Sweet Precious Liquidity, Where Art Thou?

Wow, looks like all the Gold bulls are really taking advantage of the record high prices-- George Soros did anyways. What we are seeing in Gold is either the beginning of a horrifically beautiful crash, or just a pre-crash appetizer. This is what we call market impact, or lots of Fox News viewers "taking profits." I believe there will be enough morons to net out one last group of sellers at decent prices. Someone out there with some cash to burn will believe he/she is getting a great deal and buy lots of gold at $1500/ounce. As the gold bulls watch their dreams begin to crumble as prices being reaching 1400, 1300, they will only then wonder if $2000 gold isn't all that reasonable and before you know it, gold will be at $800...Soon after, $500 or lower. Don't you just love irrational markets? Hyper-inflating gold prices turned out to be wonderful hedge against hyper inflation...I rest my case.

I'll nurse my gold trades carefully, but this monster won't be taken down without a fight. I'm looking to add more to the short after price breaks through $1500 but kicks back off of it from below. We must simply wait for the pain to increase.

I'm also watching the Turkish Lira very closely. It is an extremely good deal right now verses the dollar. Goldman Sachs must be in the business of philosophizing when they aren't trading. They are not happy with Turkey and their low rates therefore they are paying to prop up the dollar against it. I surely hope Goldman isn't that stupid, hopefully they are luring in the morons who BLINDLY follow their trade calls to gain some cheap liquidity. I see the Lira becoming a very nice trade over the next few years as Turkey reacts to their inflation troubles.

Thanks yet again for visiting the blog, folks! Be careful out there, whatever you do, don't buy gold!

Twenty-Four Dollars

The gold bulls are running stronger than ever, but are they running toward a precipice? Many think not, if you happen across FOX News on a commercial break you'll discover gold is going to $2000 per ounce, you can even get a free DVD in the mail to find out how to buy your physical gold! Come to think of it, I haven't seen any gold bull commercials other than on Fox--go figure.

I've entitled this blog entry "Twenty-four Dollars" because that's about how far the gold market is from hitting the psychological $1500/ounce barrier. The question is, are there enough $2000 believers to start liquidating profit takers out of the market? I believe there are enough of these people to make at least a few gold bulls very happy.

The bursting of the gold bubble is a tricky trade because it's all about the technicals and timing. The inefficiency I'm looking to exploit is the liquidity crisis that will emerge...eventually. The danger is that I time the trade wrong.

I maintain my belief that the emerging hawkishness in The Fed will be the pin that pops the gold bubble, now that we are nearing that $1500 mile marker I believe it's time to begin averaging into the trade--but slowly and cautiously. I've readjusted my prices to a small degree and will initiate a position @ $1525.00, adding more as prices wash above this price. These record high prices should begin inducing some selling. We'll see, wish me luck!

Flat On Euro

In the midst of expectations of the EU raising rates as early as next month, the Federal Reserve has begun hinting at a tightening of it's own economic policy.

It's hard to say what the new differential will be, so I'm flat the EURUSD for now. I liquidated all my positions. I'll continue building positions in other pairs for the time being, and I have a close eye on the gold market.

As the US continues to recover, the gold bull will be slaughtered. Now that the Fed is mentioning rates, the markets could get very interesting.

In my next post I'll explain my next trade I see being a big winner in FX, and of course I'll be testing the pressure in the gold bubble.

Euro Watch

The FOMC this past week has voted in favor of buying 600 billion worth of long term bonds, and was crystal clear in their outlook on the US Federal Fund rates saying:

"The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period."

Couple this with the rhetoric coming out of the European Union and the mid-term relationship between the Greenback and the Euro shines though. As far as investors are concerned, the Euro is the winner in terms of the real utility it offers not only in yield, but in it's safe haven status.

Curiously, the last month of unrest in the Middle East has produced a surprising lack of risk averse money flows into the dollar. At this point in time, the Dollar is a bad bet. Until the economic recovery in the US crystallizes into real confidence inspiring measurable progress, the Dollar will remain stagnant and see continued declines.

If the European Union does follow through and raise interest rates next month, and the US maintains it's low rates "for an extended period," the Euro will only continue it's appreciation against the Dollar until the relationship between the two currencies changes. At a conservative speed of the uptrend in the Euro, 1.5 by years end, and 1.60 plus within two years is quite possible.

As of the last three trading days, the market is confidently trading above the 1.40 mark, after an extended period of resistance at this level. I believe now that the market has broken the 1.40 mark, 1.40 will take the role of strong support, although it will almost certainly be tested.

My focus this week will be to increase my holding in the Euro down to the 1.40 mark as I have a comfortable cushion of floating profits from 1.35. Even if the EU fails to raise rates next month, the Euro will still be a better choice over the dollar, but the trend will obviously slow down to a degree, but remain intact.

Blowing Bubbles, Gold Bubbles

I have to say I thoroughly enjoyed the Discovery Channel's show "Gold Rush, Alaska."
On the last episode we learn that the season really wasn't the success the good old boys thought it would be. The stars of the show, the Hoffman family from Oregon spent over two-hundred-thousand dollars on equipment and operational costs. The idea was to go up to Alaska, dig a hole and get rich. It was a bad bet in my book. Not only were they betting that they could find enough gold to cover their expenses and produce a profit, they were also taking a directional bet on the gold market. The ironic thing is that they were right about the price of gold, but the digging it out of the ground part was a sorry waste of a huge chunk of capital. Had the Hoffmans taken their money and simply purchased Gold contracts, they'd be sitting pretty nice right about now. Since they are were willing to risk losing all their money, they could of even leveraged up their bets, it would have been a lot easier than driving an excavator around all summer. Sorry Hoffmans, just sayin'.

So what's the deal with gold? Why are there people paying $1430/ounce for the stuff? Oh that's right, the world is ending and when the world ends the cool thing to do is spend all your money on gold. Even the folks who work in public radio are buying the stuff they actually have a whole series on gold. I think they do a good job of approaching the topic from many different angles. Here is a link to the series:

NPR's Planet Money, Series on Gold

Over at ForexFactory.com I've talked a lot about order flow and market microstructure in the last couple years. Knowing how markets operate is essential in understanding why buying gold is not the best idea right now, especially in any significant quantity.

The sleeping giant in the gold market is the open interest. Open interest is basically open/existing trades. When market participants buy mass quantities of something and don't sell it back, the market delays any negative feedback trading.

Mark Andrew Ritchie in his book "God In The Pits" gives a great first hand account of the Hunt Brothers corner in the silver market in the late 1970's and early 1980's. The hunt family began buying silver contracts but would not sell them back in the market, after a while, they held so many silver contracts that they could basically demand whatever price they wanted. Their goal was to take physical delivery of silver, but because of the quantity of silver contracts they held and the disruptions they caused in the market, they ended up being forced to sell out of their positions. I mention the Hunt brothers simply for the sake of an example of a market that is not really trading, but hoarding. I believe gold is in much the same situation right now. It's not a single entity causing gold to go parabolic, but a mass of people who are irrationally buying because "it's the end of the world."

Every minute gold continues it's rise into the stratosphere, the fewer buyers there will be. To realize profits at these inflated prices, those who are long gold need someone willing to pay them the high price for their contracts to net them out at a profit. Those who are populating the sell side of the price ladder now, are the smart ones. The only way everyone who is holding gold right now can profit, is if new buyers come in and match the volume that has caused this bubble. I don't know if you've noticed or not, but gold is getting really expensive. What is the probability that there is enough money sitting out there in the form of new buyers to provide enough liquidity to such an already irrationally inflated market? The USA is still in the throws of a recession, but is going to pull out of it. I have no doubts about that. Every day that passes brings the United States one day closer to an inevitable interest rate hike. That day might still be a couple of years ahead of us, but when even a hint of a US rate hike is in the wind, the Gold bulls are going to realize that the world is not ending and sheer pandemonium in the gold market will be unleashed. Gold will collapse down to the $400-$500 dollar mark within months, and many will experience substantial losses. To liquidate gold at current prices means you need increasingly irrational investors to sell to, when those buyers are all gone, the gold bubble will burst. When all that open interest sells when the panic sets in, they will be selling at a steep discount in the land of realistic bids.

As a trader, I'm watching the markets closely and looking for signs of US Dollar strength. I think we will see gold reach > $1500 before the collapse. My tentative plan is to start averaging into the gold market above the $1500 mark, and riding the wave down to $500.

Right now I'm continuing to hold my long positions in the Euro, and plan to through the year or until 1.5 is reached. I'll watch news coming out of the US very closely, but I think when it's time to short Euro it will be time to sell Gold. We are about a year out, in my humble opinion that is--it'd sure be convenient anyways.

The Gas Guzzling Debt Junkie USA

I call Lincoln, Nebraska home; it's a beautifal place year round, but the winters can be long and treacherous. I'm humored when I see folks out navigating the snow covered roads in their European imports. I'm a fan of high quality German engineering, but even the all wheel drive Audi only has six inches or less of ground clearance making them painfully impractical for our Midwest climate. Then there is all the salt that we put down on our winter roads, ensuring rust will begin invading every nook and cranny in the quickest time possible. I make this point only for the sake of venting.

Speaking of cars though, why don't more of us realize that our vehicles are really just shiny garbage bins in which we throw our money? Transportation is the goal, well, safe-practical transportation in our case, so why not approach the problem of getting around with that in mind? Americans, at least the majority of the ones I see and know don't think this way. The problem is that many approach the purchase of a vehicle like that of a pair of trousers or maybe a new pair of shoes. The vehicle has become a status symbol, unfortunately for Americans, a very expensive
status symbol.

The trend has been to drive very large SUV's at least for the last decade. Bernanke said in the last few days that this new surge in oil prices is unlikely to slow growth and US economic recovery. Who is old Benny kidding?! High fuel prices are simply forced asset allocations for anyone who drives. The dollars that are put into the gas tank come out of ones overall budget. The bigger and deeper the gas tank gets, the larger the chunk of the budget it consumes. Because many Americans don't think along these lines, their SUVs they drive to get groceries in are leaving them strapped for cash in other places. In aggregate, this creates a huge inefficiency in the US economy. It would have been better if the Oil bubble never burst and America adjusted to the new prices by downsizing their vehicles. Some did, many did not.

The middle east has become a hot-bed of unrest and will continue to be in the years to come. China is growing at staggering rates right along with India. The world is changing. The American relationship with black gold is therefore going to have to change. What America does with oil is going to be a key factor in her recovery. These high prices are unsustainable at current consumption rates, something has to give, I beleive it will be the love affair with the large gas guzzling SUVs.

As you make your transportation choices, ladies and gentlemen, try to think logically about what you really need. If you don't like paying $5.00 per gallon of gas, go make more money to compensate or get a vehicle that returns you maximum value for the money you are BURNING with it.

Gas is just one factor when looking at the mess the USA is in, but it's an important one, hence the long rant.

Last weeks COT showed continued buying following that small dip. The statistics have not/will not change regarding a pullback to 1.3425, I built a modest position that I've been holding for three weeks now, but I'm * almost * certain the market will pull back before it marches above 1.4. My plan of action remains the same. I hope to average in down near or possibly below 1.35.

Once price does break 1.4, I plan to roll a portion of my floating profits right back into the market. 1.5 and beyond, here we come.

Here is a good Euro-bull article from Reuters today:

Here

In my next post I plan on sharing my views regarding the Gold bubble and when I expect it to burst. Gold still has plenty of upside potential, the more continued buying the harder and scarier the crash will be. I'm thinking late 2012, no not because it's 2012, but because by then I expect the USA to be talking interest rates...Until next time, God bless and good trading.