Gold: Dead cat bounce or double bottom?

Gold is at another interesting inflection point. After the break of support, gold crashed 15% in two days. It has since then staged a bounce and is now retesting support. Is it going to be a dead cat bounce and collapse further or a double bottom and rally?

Source: Stockcharts, PatternSite

Is the great trend over? I’m not sure, but if you’re an intevestor in gold I hope you’ve been double checking your thesis. A great place to start is the Golden Dilemma paper also here and here. In short, it examines the common reasons for holding gold, including:

“gold provides an inflation hedge”
“gold serves as a currency hedge”
“gold is an attractive alternative to assets with low real returns”
“gold a safe haven in times of stress”
“gold should be held because we are returning to a de facto world gold standard”
“gold is underowned”

Examine your own reasons carefully. Most people blindly buy into gold as a religion. I used to believe that gold was a hedge against instability but I’m not so sure anymore, as it trades more like a financial product, commoditized by wall street. Gold’s former role should have thrived in the current environment of intervention and positive feedback loops but it has since lost the qualities that have been described by others:

“The abandonment of the gold standard had broad cultural significance. It is no exaggeration to insist that going off the gold standard was the economic equivalent of the death of God. God functions in religious systems like gold functions in economic systems: God and gold are believed to be the firm foundations that provide a secure anchor for religious, moral, and economic values. When this foundation disappears, meaning and value become unmoored and once trustworthy symbols and signs float freely in turbulent currents that are constantly shifting.” ——Mark C. Taylor

The end of the gold standard (1973) unfettered the dollar from precious metal backing and laid the seeds for unconstrained credit growth. The economic consequences of the movement off of the gold standard have been incalculable, but the psychic effects have been no less profound. In a world in which financial promises are only as good as the counterparties that make them, gold is a promise kept. Gold is the anti-derivative, the anti-credit default swap, the anti-LBO. More important, it is the anti-dollar, the anti-fiat currency. And a fiat currency is the ultimate example of a promise, increasingly, a promise that can’t be kept. Gold is a tangible object in a world that came to overvalue intangible things. It is grounded in a world where few values are grounded. Most important, it is a physical good that is limited in supply. If the end of the world ever comes, gold will be your best friend. And it is indisputable that the end of the world is closer today than it was yesterday, and will be closer tomorrow than it is today

Source: Michael Lewitt

It seemed like the world was a perfect place for the former ‘foundation’ version of gold, with government intervention reaching new extremes in this Keynesian experiment. Positive feedback loops now taking place will have unintended consequences in the future. No one knows how this experiment will end. Gold seemed like the perfect place to hide….

Source: Ineichen Research and Management

As I said before, gold has traded more like a financial product lately than the foundation or hedge it was supposed to provide. Is the trend in financial assets to gold (Tangibles) finally reversing course?

Source: ShareLynx

No one can tell you for sure. As an investor, I don’t like gold under its support line around 1500. Under that line and its much harder to manage risk and know when you’re wrong. We shall see where gold heads in coming days.

Words from the wise/Things I'm reading

Been busy lately, but I’ve still had time to read. Here are some interesting articles and podcasts:

Ned Davis via PragCap at Big Picture

If you want to know if its worth your time to spend an hour with this legendary technician, consider what Ned calls the four basic traits of successful investors:

1. They look at objective indicators. Removing the emotions from the investing process, they focus on data instead of reacting to events;
2. They are Disciplined: The data drives decision making with pre-established rules. External factors do not influence them;
3. They have Flexibility: The best investors are open-minded to new ideas, or revisiting previous thoughts;
4. They are Risk adverse: Not always obvious to investors, it is a crucial part of successful investing.

via falkenblog

Cliff Asness: An hour interview with Cliff Asness.

It would be hard to improve upon Cliff’s Big 4 Investment Principles:

Cheap stocks beat expensive stocks
High carry beats low carry
Low risk beats high risk
The trend is your friend

Five Steps Toward Becoming Your Own Trading Coach

1) Developing a Framework for Thinking About Markets – The successful traders I’ve known and worked with have developed their own ways of thinking about markets, supply and demand, intermarket relationships, and the like. This framework helps them understand why markets do what they do; they are conceptual lenses through which traders interpret market action. My own framework has developed from an appreciation of Market Profile theory and concrete experience working with various groups of market participants: retail, market makers, investors, etc. That framework sensitizes me to the market behavior of the largest participants, seeking clues from their behavior as to likely near-term price movement.

The Fed and Interest Rates – The Details

long rates are ultimately a function of current economic conditions. The Fed sets short rates based on expectations of future economic conditions and long rates are an extension of short rates. In fact, if the Fed wanted to pin the 10 year t-bond at 0% it would just do it, but that’s a different matter. And bond traders front-run the Fed in trying to outguess the future economic conditions. So, it’s best to think of this whole relationship like a person walking a dog through traffic. The Fed walks the bond market around and the bond market tries to steer the Fed by guessing where traffic is headed. But the Fed can always control the rate and the leash if they want. The dog ultimately knows this and so doesn’t steer too far from its master (though it doesn’t want to be behind its master!). So it’s all a delicate guessing game because there’s no telling when the traffic might become faster or slower than we expect.