"Water shapes its course according to the nature of the ground over which it flows; the soldier works out his victory in relation to the foe whom he is facing. Therefore, just as water retains no constant shape, so in warfare there are no constant conditions."
Sun Tzu

Friday, January 4, 2013

5 Reasons Why I Shorted Gold Yesterday

Shorting Gold is probably the most unpopular trade these days, which is why this position is so compelling. I like unconventional trades.

Here are my arguments:

1. Intermediate term fundamental outlook unfavorable
If you believe that the US economy will accelerate in 2013, then selling Gold makes a lot of sense.
Investment money would move into risk assets, a stronger Dollar and rising real interest rates would  put pressure on the metal.

In fact, I'm not alone with this thought. Goldman Sachs had a bearish call last month. However, interesting was the reaction in the financial world: type "Goldman Sachs Gold" into Google and you get hits like "Pros slam Goldmans Bearish call", "Ignore Goldman's bearish outlook" or my favorite "Is Goldman lying about Gold".

When there is so much controversy about a call, large moves can be expected since markets tend to surprise the majority of investors.

2. Gold didn't move despite record negative real interest rates
The price of Gold is highly correlated to real rates, which have been at record lows in the last year. 10Y yields went negative in January 2012 but Gold hasn't moved anywhere in the last 12 months. If fundamental relationships do not play out, it is usually a warning sign. What will happen if real rates would rise? Suddenly, bonds yields would start competing with Gold, which obviously is a non-yielding asset.

3. Gold declined after the December "QE4" announcement
One would have expected a move into Gold after the December 12 FED statement, but investors sold the "good news". That's not a good sign. By the same token, interest rates have been on the rise in recent weeks. Obviously, the "accelerating growth theme" trumped additional money printing.

4. Gold in a downtrend since October
You can't argue with price action and the swing high two days ago offered a nice opportunity to enter a short position with a clearly defined stop around $1,700 in case I'm wrong. 

5. Attractive risk/reward
The risk/reward for this trade is extremely compelling, even with the first obvious target of $1,550. This is a 1:4 RR trade. Should Gold indeed breach intermediate term support, strong selling could push prices down quite rapidly. Technically, the metal could fall down to the $1,300 level without violating its long term uptrend:

Disclosure: Covestor model portfolio is short GLD.