2008-10-01

All that shines is not Gold

GOLD (ZGZ8/GCZ8)

Sell up to 900 Stop above 935 Target 650 - 550

This is a risky trade. Gold has recently made bold upward moves nearly $110 in just two days. The world appears to be running out of physical gold. The recent headlines are all bullish for Gold.

Investors start a fresh gold rush

Wealthy investors drain supplies of gold by hoarding bullion bars

It seems that the world is running out of Gold. Most GOLD ETFs have reported huge inflow of funds in recent days. So why do I look for downside in Gold. My reasons are all based on chart. It is quite evident that recent moves in Gold were driven by extreme panic. It is also a fact that extreme panic is usually short lived and it is best to fade (counter trade) the panic moves.

I have also been suggesting strong dollar (When going gets tough .... the Dollar gets going).
A careful analysis of the charts indicate that dollar has turned corner against all major (and minor) currencies and the bear market in dollar appears to be over. If dollar is strong usually that is not good for Gold.

Another source for Gold demand used to be jewellery demand from India. This is significantly low this year for obvious reasons. The price is too high and economy is no longer booming. Apparently India has imported 75% less physical gold this year.

Even in these panic moves, Gold has failed to make new highs or even hold on to current highs convincingly.

Factors which can go against this trade are - another round of panic or relentless hoarding of cash in Gold by rich investors who have lost faith in all world banks. Also LBMA (London Bullian Market Association) is forecasting a price of 980 by this time next year and they are usually quite accurate. But that does not exclude possibility that we can see a sharp move down and then return back to safety of Gold later when it is confirmed that the "bail out plan" does not solve the economic problems.

I have taken a small short in December Futures at 890 level. I am planning to add more after a breakout below 850. That could also be a time to start moving stops lower.

4 comments:

  1. Very brave indeed!
    I went short at $843 and came out at $831. I will go short again at $814 with a view to coming out around $770 - but I had assumed that the bail out would generally be accepted to have been a failure by then and I can't see where gold will move after that. Given the long term uncertainty my guess is that gold bull run still has someway to go and, even though I agree that the charts do suggest it, a retracement to $650 seems to me a very low target in this climate... Will watch avidly!

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  2. Thank you and great trade. I am still holding on to my short with stop loss moved below entry level making it a risk free trade as of now.

    Another interesting trade which is being set up is that platinum is approaching gold price (it used to be 2xGold lately). I am watching that closely and can result in a good trade. Watch this space

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  3. Just wanted to say great call on gold. Your $650 seems within easy reach now.

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  4. Thank you! I hope you had a good trade too if you rode it all the way.

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-VS