Wednesday, December 23, 2009

Buying Gold and Euros by Selling Dollars

I think these charts are pretty self explanatory. With the euro (above) I see an opportunity to profit from a 200 dma bounce after taking profits on my Australian dollar short. I'm targeting the 50 dma and the 200 dma will be my stop.

Gold (below) is something that I have wanted to own for some time now but didn't want to chase a parabola. Mr. market obliged and gave me a huge pullback to support at the last breakout price. I don't think the gold bubble is over yet and am expecting new highs for gold in 2010 (based entirely on the chart). If gold drops further I'll add.

Disclosure: I covered AUD/USD (at a very nice profit) but expect to reshort it in a week or so. I am now long EUR/USD for a bounce. I started buying GLD yesterday. Good luck!

9 comments:

kaleb5 said...

Your thoughts
GLD vs. NG (missed a nice move Tuesday)
SLV vs. HL

pythagoruz said...

Well its a tough question because in 2009 natural gas (NG) decoupled so much from everything else that there is little reason to believe that things will change. It seems reasonable that NG would move with the US dollar (as most commodities do, especially oil) but I think that it is such a localized commodity (if there isn't a market nearby it gets flared off) that it truely doesn't correlate much with global fx stability or credit risk, as gold does. So it doesn't seem like an alternative at all for an investment in gold.

Although, the NG long term chart does look bullish to me and I certainly stand by my bottom call months ago. I am not such a fan of UNG anymore in part because I got burned and in part because the chart looks far less impressive than continuous NG, albeit a bottomed chart, and that disturbs me. Gold on the other hand looks identical to GLD and they both look pretty bullish to me. When you buy an ETF for exposure to an underlying commodity their charts should match up pretty well, not the case with NG and UNG.

As far as the other, I honestly don't know what HL is. I probably sound like an idiot but you'll have to fill me in. Silver versus gold to me is really a question of economics. They are very similar in nature and charts. If you buy GLD or SLV your returns over a relatively short term horizon will be about the same. But over the long term SLV should outperform in strong economic conditions (because it has industrial uses) and GLD will outperform in riskier times where there is less economic stability. I would guess that a ton of hedge funds are buying gold and shorting silver right now (based on my opinion of economic conditions) but the margin is way to thin to be of interest to me.

What do you think?

kaleb5 said...

Reboot....your thoughts on:
SLV (the ETF) vs. HL (Hecla Mining the miner)
GLD (the ETF) vs. NG (Novagold the miner) big move Wednesday, pullback Thursday.
Thanks, sorry for the confusion.

pythagoruz said...

Hey Kaleb,
Generally I'm more interested in investing in the underlying commodities because they seem to be better behaved (easier to predict) and outperform in the long run. Commodities have inherent value whereas a company's value is really determined by the whim of investors and has very little real value although many would disagree with me on that. Fact is, commodities can't go bankrupt and there isn't a management element to worry about.

That being said, looking at the charts... HL looks pretty bullish as it resides above its rising 50 dma, a healthier chart than SLV. SLV has pulled back more though, so if you think SLV will rebound and make new highs then I'd go with the underlying. I assume that if SLV does not rebound HL will take a a bigger hit, having not corrected much.

With NG I think I'd say pretty much the same thing except that NG is more erratic. With NG back at the highs last week I see more potential in buying GLD because GLD still has a ways to go before reaching the highs again. I would feel like I was chasing NG if I bought it here.

In both cases I would judge NG and HL like any other stock and make trades based on the chart alone. I'd have a tight stop too because I wouldn't trust them. I would not buy NG because I thought GLD looked bullish, I'd buy GLD since they seem like imperfect substitutes.

For comparisons I like looking at the ratio charts, here's NG/GLD

http://stockcharts.com/h-sc/ui?s=NG:GLD&p=D&yr=0&mn=6&dy=0&id=p71475662083

As you can see, NG is outperforming GLD and makes me think it might be better. So, dunno.. Personally, I feel much more comfortable holding GLD than I would NG.

Here's HL/SLV:
http://stockcharts.com/h-sc/ui?s=HL:SLV&p=D&yr=0&mn=6&dy=0&id=p71475662083

Night picks though, bullish looking charts all around. Cheers,
-py

kaleb5 said...

Thanks for taking a look Pyth.
Looks as if gold and silver (your post) might have some nice upside especially when dxy starts its inevitable tumble.

chintan shah said...

Correllation b/w NG & gold,HL & silver is very high.As both stocks are small cap and less liquid there is relatively more volatility compared to SLV,GLD.
If you are bullish on gold or silver you can take exposure by going long on silver ETF(SLV) or gold ETF(GLD).otherwise
Investing in this exploration/mining companies dont make much sense.

My view is there wont be any significant action in precious metals as now focus is on yield..there is some really high probability that yields on US Gov. fixed income instruments may rise.

chintan shah said...

HUNTER,
correlation implies causation coz there is significant rationality in causality ;-)

chintan shah said...

Hunter,
You are right about NG.
NG has become highly volatile after 2000 and has almost no correlation with any major instrument.
there is a trader whose name is john arnold(Ex Enron... now centaurus energy) who has generated 150++%% since 2001 by trading natural gas.My guess is he is not speculating but making markets on OTC natural gas derivatives.

Seems pretty elusive me too..generating such a kind of returns consistently!!

What do you think?

pythagoruz said...

Chintan, yeah that doesn't surprise me that a commodity derivatives market maker would make returns of 150%+. Especially with the high volatility of volatility in natural gas over the past few years. I would note that the winner of last year's IB olympiad won by trading energy and energy related derivatives. I don't know the details but i think he was doing things like buying oil futures and shorting gasoline futures or something of that nature. His program returned around like 300% in two months if I remember correctly. There seems to be a lot of money on the table for a smart algorithm. Good luck,
-py