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April 11, 2013 by Leave a Comment

The Gold & Silver Speculator (11 April 2013)

This is a sample entry from Kurt Pfafflin’s newsletter, The Gold & Silver Speculator, published on April 10, 2013.

SELL GOLD, SELL GOLD! GOLDMAN SACHS SEES DOWNTURN IN GOLD CYCLE ACCELERATING, SLASHES PRICE ESTIMATES & RECOMMENDS INITIATING NEW SHORT COMEX POSITION. MEANWHILE, BANK OF JAPAN OPENS THE QE MONETARY FLOODGATES SETTING THE COURSE FOR UNPRECEDENTED EASING.

Greetings!

Gold & Silver Bears rejoiced in ecstasy today as Goldman Sachs Commodities Research report torpedoed Gold’s fragile bounce off the $1539 low print last Thursday, shredding -$30 off intraday.

Friday morning’s pathetically weak Non-Farm Payrolls (NFP) shocker caught the Bears off guard, forcing some of them out of their profitable shorts and fueling a $50 short-covering rally that continued through Tuesday’s session, marking a high of $1590 before succumbing to the relentless negativity propagated by the likes of Goldman Sachs and Société Générale among many others.

While the amazing, high-flying S&P zooms to a new, record-setting all-time high, extreme pessimism reigns supreme in the Precious Metals markets. Although the Bulls’ hopes of igniting a larger spike higher have been absolutely crushed (yet again), highly-profitable Bears should have some doubts about how much longer this stranglehold on sentiment and price can last.

Today’s uber-bearish GS commodity research report and short-sell recommendation comes at a very interesting time – just as the desperate Bulls get a bounce off critical well-tested, long-term support and especially when viewed against last week’s Commitment of Traders (COT) reports for the Gold & Silver futures markets (see chart analysis below).

I’ve often wondered whether their analyses would be any different if they were to view the “barbarous relic” as the hard currency and historical store of value it has always been as opposed to a simple commodity that is merely produced and consumed? I guess we’ll never know?

Based on their research, GS analysts – in their infinite wisdom – apparently believe the recent downturn in the Gold cycle is accelerating so they are slashing their near-term and long-term gold price forecasts and positioning themselves on the short side of the market.

They are also recommending initiating new COMEX futures short positions to their clients (with June Gold trading $1560, they’re shooting for a -$120 drop down to $1450 with a stop-loss $90 higher at $1650).

So, why is GS so bearish on the yellow metal? Their justification for such extreme negativity towards Gold appears to be primarily predicated upon GS economists’ expectation that a substantial acceleration in US economic growth later this year will support higher real rates and ultimately destroy demand for Gold.

Ahem. Maybe its just me but Friday’s miserable NFP reading of only +88K jobs added versus the lowest estimate of +200K just doesn’t seem to be the type of positive acceleration they’re looking for? Let me go on record to say that I stand in complete disagreement with their line of thinking.

Here are Goldman’s JUST REDUCED USD-denominated Gold price forecasts (take them for whatever they’re worth to you. Or don’t take them at all.)

2013 YEAR END: GOLD $1,450 (-$110 FROM CURRENT PRICE $1560 BASIS JUNE)
2014 YEAR END: GOLD $1,270 (-$290 FROM CURRENT PRICE $1560 BASIS JUNE)

Meanwhile, in an effort to reach their 2% inflation mandate or target within the next 2 years, the Bank of Japan announced shockingly aggressive, bold, new quantitative and qualitative monetary easing programs.

Parroting last summer’s quote from ECB’s Super Mario, bureaucrats and politicians in the Land of The Rising Sun will do “whatever it takes” as they implement what they believe to be the ultimate solution to finally rid their economy of deflationary forces.

Japan has embarked upon what has been called the largest sovereign balance sheet expansion known to man – far greater than the US Fed’s QE measures percentage wise. The BOJ is now set to unleash an unprecedented flood of liquidity into world markets. Will any of that eventually find its way into the Gold & Silver markets? Only time will tell…

Please refer to the charts below for further commentary and analysis…
*Look for email alerts/market updates should conditions warrant or if/when environment allows

JUNE GOLD (GCM3) – WEEKLY CHART

gold1

MAY SILVER (SIK3) – WEEKLY CHART

silver1

“Buy when there’s blood in the streets, even if the blood is your own.”
– Baron Rothschild (1871)

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Filed Under: Current Events, Gold & Silver Speculator, Market Analysis Tagged With: , , , , , ,
December 8, 2010 by Leave a Comment

Reducing Portfolio Exposure to the US Dollar

This post is part of Craig Turner’s Innovative Trading Concepts series and originally appeared in FutureSource’s Fast Break Newsletter, where Craig Turner is a regular contributor on various futures trading topics.

Many investors and traders have too much exposure to the US Dollar.  Owning stocks, bonds, real estate and commodities priced in USD creates massive exposure to the US Dollar.  When markets crash, most asset classes are sold heavily and the US Dollar increases, in what is referred to as a “flight to safety” market reaction.  The problem for most investors is that they conduct all of their investments or trades in US Dollars, so when the Dollar goes up, the rest of the market is going down.  When the market crashes and you need diversification the most, most assets are sold and capital flees to the US Dollar.

Risk Management & Undiversifiable Risk

Any investor or trader, who has spent some time reading about risk management, has come across the terms “systemic risk”, “systematic risk” and “undiversifiable risk.”  These concepts are built around the fact you are always long assets, and you are long in exchange for US Dollars.  Furthermore, because your portfolio is always made up of “long only” positions, you are always subject to market collapses.

Your exposure to market risk does not have to be so extreme.  You do have options, and it is easier than you think to reduce your “undiversified risk” in your portfolio.  One way to reduce this risk is to hedge out some of your exposure to the US Dollar.  This will not hedge out all of your undiversifiable risk, but it will help should the market crash.  If you want to reduce your exposure to the US Dollar, then you need to buy the US Dollar Index futures contract.

Reducing Undiversifiable Risk through the US Dollar Index

The US Dollar Index is a futures contract that prices the US Dollar against a basket of foreign currencies.  This basket of currencies is made up of the 57.6% Euro Currency (EUR), 13.6% Japanese Yen (JPY), 11.9% Great British Pound (GBP), 9.1% Canadian Dollar (CAD), 4.2% Swedish Krona (SEK) and 3.6% Swiss Franc (CHF).

If you are long the US Dollar Index, you are long the US Dollar and short the Euro, Yen, Pound, Canadian, Swiss Franc and Krona.  If you are short the US Dollar Index you are short the US Dollar and long the basket of foreign currencies.

If your portfolio is made up of entirely long positions, bought in US Dollars, you can reduce your exposure to the USD through buying the US Dollar Index.  The long position of USD in the US Dollar Index will cancel out with some of the short USD exposure in the long only portfolio, leaving those positions long in terms of the basket of foreign currencies.

Example: Long Gold

Let’s say you are long 100 oz gold at $1400/oz in the futures market.  You are long $140,000 of gold priced in USD.  This can also be viewed as gold vs.  USD cross, or Gold/USD.  In order to buy gold, you had to use US Dollars, so you are long gold and short dollars, which can be represented as long the Gold/USD cross.

Now let’s say you don’t just want to hold Gold in USD.  You want to hold Gold in a mix of USD and foreign currencies.  Your long Gold position is a Gold/USD cross.  To hedge out the USD, you need to be in a position that is long USD and short something else.  If you sold the EUR/USD cross, you would be short Euro and long USD.  That would look like a long USD/EUR position.  If you combined USD/EUR + the existing Gold/USD, the long and short USD would cancel each other out and you would be left with just GOLD/EUR, or long Gold in terms of Euro.

GOLD/USD + USD/EUR = GOLD/EUR

Now that we have that concept down, apply it to being long Gold (Gold/USD) and long the US dollar Index (USD/(EUR+GBP+JPY+CAD+CHF+SEK)).  Long the US Dollar index at 80.000 is an $80,000 total contract value.  Lets combine our long Gold and long US Dollar Index position and see exactly what it turns into:

  1. Long 100 oz Gold at $1400/oz = $140,000 GOLD/USD
  2. Long 1 US Dollar Index at 80.000 = $80,000 USD/(EUR+GBP+JPY+CAD+CHF+SEK)

The second position is long $80,000 US Dollar Index.  That $80,000 long US Dollar in the second position will cancel out $80,000 of the $140,000 short USD from the first position.  That leaves us long only $60,000 Gold/USD and the other 80,000 is now long Gold/(EUR+GBP+JPY+CAD+CHF+SEK).

  1. Long $60,000 Gold/USD
  2. Long equivalent of $80,000 Gold in terms of EUR, GBP, JPY, CAD, CHF and SEK.

I am now long gold in a basket of currencies.  You can apply this method to any asset.  The US Dollar Index’s total contract value is a multiple of $1000 against the Index.  So if you want to hedge out $800,000 of USD exposure in your overall portfolio, all you need to do is buy 8 US Dollar Index contracts at 80.000.  80.000 X $1000 = $80,000 total contract value.  $80,000 X 10 contracts = $800,000.

This example not only works with an investment in gold, but it can be any other futures contract, stocks, bonds, etc.  All you are trying to do is reduce the net exposure you have to the US Dollar.  If you think about it, if your total financial portfolio is made up of things you have bought (stocks, bonds, real estate, etc) with USD, you have one massive synthetic short US Dollar position (Portfolio/USD).  That is why when the markets crash, your entire portfolio goes down.  Everything is sold while the US Dollar is bid up.

Why Investors and Traders Need to Hedge their US Dollar Exposure

You never know when the next financial crisis will occur.  You never know when we have the next flash crash or when the next European nation will default on its debt.  By reducing your exposure to US Dollar, traders and investors can reduce their “undiversifiable risk.”

While the US Dollar Index can hedge out $80,000 of USD risk when priced at 80.000, the required margin for the US Dollar Index is only $1729 per contract.  For a few thousand in margin a trader or investor can efficiently and effectively hedge out some of their currency risk to the US Dollar.

Some investors and traders I work with ask me why not just use put options for protection.  The problem with put options is they are a wasting asset.  The time decay on the puts makes it expensive to hedge against the unknown.  Futures are not a wasting asset.  If the US Dollar is trading at 80.000 noah, well w, and it trading at 80.000 three months from now, the P&L is $0.  Anyone who ever bought an option, had the price of the underlying go unchanged for a few months, certainly knows that their option will be worth considerable less because of the time decay.

Take Action and Protect Your Portfolio

If you are concerned about your exposure to the US Dollar and US assets, you need to talk to your futures broker and figure out the best way to hedge some of your exposure to the US Dollar.  If you don’t have access to an industry professional who understands hedging portfolio risk, give us a call at Daniels Trading and we will be more than happy to help you reduce your “undiversifiable” portfolio risk.

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November 19, 2010 by Leave a Comment

Why America Needs a Strong US Dollar

This post is part of Craig Turner’s Innovative Trading Concepts series.

I’ve been hearing a lot lately that a weak US Dollar is good for America.  The theory is a weak US Dollar will increase US exports.  The American currency will be less valuable against foreign currencies, making US goods and services cheaper for foreign consumers.  This will lead to increased demand for US products, and we will sell more goods and services to the global community.

I have also heard that a weak dollar is good for the stock market.  As the US Dollar declines, more money moves into stocks, bonds and commodities.  The weak US Dollar sends these markets higher, which is good for investors.  Perhaps you have read these stories also, or seen pundits talking about them on television?

While these theories are 100% correct in their own microcosms of economics, they miss the point terribly in the great macro realm of how things really work in global economics.  Unfortunately, these “benefits” are only short lived, and in the grand scheme of things, the positive economic stimulus they provide is negligible.  A weak US dollar is just the short term silver lining for a brutal long term economic reality.  The weak US Dollar does massively more harm to our economy over the long term than any of the short term benefits provided by a weaker currency.

A Weak US Dollar Leads to Inflation

There are two major issues with the declining US Dollar, and we will start with the lesser of the two.  A declining US Dollar causes price inflation.  With high unemployment and low growth GDP, Americans’ earnings are not going to be able to keep up with price inflation.  All of the daily basic goods and services we need will cost more, making it harder on Americans to make ends meet.  We can see this today as grains, livestock, energy, and softs commodity futures markets soar higher, meaning higher prices for the US consumer in the not to distant future.

A Weak US Dollar Reduces Investments in US Businesses

However, while price inflation certainly hurts the average American worker on Main Street, the real problem is going to be the decline of investments in US businesses.  A weaker US Dollar causes money to flow out of the United States into foreign countries with strong currencies.  The money that leaves the US is money that could have been used for long term business investments.  This includes investments in medicine, technology, new business ventures, infrastructure and so much more.  A strong US Dollar keeps that investment money in the United States.  Foreigners keep their funds in Dollars because they have confidence in the US economy.  A weak Dollar sees that investment capital go elsewhere.  It is these types of investments that add millions of new jobs through innovation and entrepreneurial ventures.

We will not see the effects of the weak US Dollar until years to go come, when it is not the US that is creating high end jobs in new industries, new products, and new services.  Over time, as long as the US Dollar is weak and declining, those jobs and industries will be sprouting up where the foreign currency is strong and stable.  Long term investment capital wants strong currencies and pro-business government policies.  It is these two qualities that attract investment capital that will reduce our unemployment rate and produce real, sustainable growth in our economy for years (and generations) to come.

The next time you read an article or hear a commentator talk about the weak US Dollar and how it will help support asset prices, or how US exports will increase, just remember that these very short term economic gains will be greatly overshadowed by the long term harm a weak dollar causes in our capital investments in US businesses and industry.

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