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Why I Covered My Gold Short
I have to tell you that I was just not feeling the love from my gold short when I came into the office Wednesday morning. You would have thought that, with a double top on the charts in place, there would be a move of the same ferocity we saw two weeks ago, when the barbarous relic cratered $220 in days. But this time, when gold down $132 in 24 hours, the momentum suddenly vaporized.
There are now three possible scenarios for the yellow metal. The double top at $1,920 holds, and we collapse to $1,500-$1,600. We continue to bounce around like a ping pong ball between $1,700-$1,900. We break out to a new high to $2,000. Notice that my October puts, which I strapped on when gold was trading at $1,835, losses money in two out of three of these possibilities. Hence, time to heave-ho the gold short.
Hard earned experience has taught me that you never want to be short the precious metals whenever European Central Bank President Jean Claude Trichet speaks. He never fails to disappoint, befuddle, or outrage traders, giving new life to whatever flight to safety trades are out there.
There also is a risk that traders will reach for their barf bags once they hear Obama’s jobs speech, triggering another globalized “RISK OFF” leg. In any case, he will never get anything through the Tea Party dominated House of Representatives, so what we likely to get is a round of campaign posturing. Many Republican congressmen have already indicated that they won’t even attend. It is all moot.
I have done three gold trades this year, all from the short side, and all profitable. This is despite the fact that my long term belief is that it will eventually hit the old inflation adjusted high of $2,300. The spikes in this market are clearly more visible that the bottoms, which tend to be slow, grinding affairs. The next big call in this market will be what to do if we hit $1,920 again; to sell once more, or go long. When I figure this one out, I’ll let you know.
The market gave me a gift on my exit, with gold plunging to $1,790 off the back of some momentary strengthening in the stock market. Note to self: when the market gives you a gift, take it. It is usually a greedy mean bastard. I whipped out a trade alert that enabled my Macro Millionaire followers to book a quick 28% profit on their puts, boosting their year to date return by 72 basis points. Better not to swing for a home run this time, and settle for a single.
For those who wish to participate in Macro Millionaire, my highly innovative and successful trade mentoring program, please email John Thomas directly at madhedgefundtrader@yahoo.com . Please put “Macro Millionaire” in the subject line, as we are getting buried in emails.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.
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Republished courtesy of Phil's Stock World and Ilene
Mad Hedge is quite a fascinating character who’s had a very exciting career in finances and more. He writes daily newsletter entries on market action, stocks and trends in the economy, and I highly recommend taking a moment to peruse his site, Diary of a Mad Hedge Fund Trader.
-Ilene
Introduction
Mad Hedge Fund Trader began his career in finance by moving to Japan and working at Dai Nana Securities as a research analyst in 1974. In 1976 he was named the Tokyo correspondent for The Economist magazine and the Financial Times, which then shared an office. He traveled the world interviewing famous people, such as Ronald Reagan and Margaret Thatcher. In 1982, he was named the US editor of Euromoney magazine, and in 1983 he built a new division in international equities for Morgan Stanley. After moving to London in 1985, Mad Hedge supervised sales and trading in Japanese equity derivatives. In 1989, he became a director of the Swiss Bank Corp, responsible for Japanese equity derivatives. A year later, he set up an international hedge fund which he sold in 1999.
I haven’t even covered all of Mad Hedge’s adventures, such as his latent movie star career (as an extra in the 1979 epic war film, Apocalypse Now), and who knows what else. But now, missing the adrenaline-surging excitement of active trading, Mad Hedge has returned to the hedge fund business, set up an educational website, and is busy keeping up with the demands of newsletter writing.. So let’s begin our interview with Mad Hedge by exploring his current thoughts on the markets.
Interview
Ilene: Hi Mad Hedge. You’ve had a fascinating career having little to do with your major in biochemistry. A brief review of your newsletter shows that your recommendations early in 2009 have appreciated by an average of around 400%. You’ve been writing your daily market thoughts and investment strategies at your website - www.madhedgefundtrader.com - which it’s terrific, by the way. What are your goals with this site?
Mad Hedge: This whole thing started out as a letter to investors in my hedge fund, to tell them my thinking behind my positions. Then I thought, why not post this on the web and see what happens? Six months later it is now going out to 50,000 readers a day, mostly to portfolio managers, financial advisors, and traders. The growth has been explosive.
Ilene: Who are your readers?
I seemed to have stumbled on a market that I describe as “semi-professionals.” If you are a big hedge fund, with a staff of 600 and a huge in-house research department, I’m not going to tell you anything you don’t already know. But there appear to be a few million people out there who trade their own accounts, or invest their own IRA’s. They have never worked on Wall Street, but have taught themselves a lot about markets and investing. My letter gives them the 30,000 foot view on global stock, bond, currency, commodity, and real estate markets which they can’t find at their online broker. About half of them are from abroad. When I get up in the morning now, there are five e-mails waiting for me from China and India asking what to do about natural gas. I also try to make the letter funny and entertaining. Not all financial publications have to be dreary reading. It’s not always about the next stock to buy.
Ilene: In a recent letter you wrote that one of your favorite ETF’s is the Proshares Ultra Short Treasury Trust (TBT). Why is that?
Mad Hedge: TBT is a 200% leveraged bet that long Treasury bonds will go down. While the Fed keeps short rates low, it doesn’t directly control long rates. As the supply of government bonds increases exponentially, their eventual collapse is inevitable. All Ponzi schemes must come to an end, and the US government is no exception. We currently have the greatest liquidity driven market of all time, and the ten year is eking out a mere 3.30% yield, pricing in near zero inflationary expectations. The average yield on this paper for the last ten years is 6.20%. If the yield goes back to 5%, that will take the TBT from $45 to $70. The TBT could perform even better if Treasuries lose their triple “A” rating, which I think is a real possibility.
Historically, bonds are not a good buy in a low interest rate, deflationary environment. If long rates move from 3% back to the 12% we saw in the early eighties, bond holders will get slaughtered, and the TBT could exceed $200. Even if inflation stays low, the sheer weight of supply and credit concerns will crater government bond prices.
Ilene: What’s the worst case scenario for the bond market?
Mad Hedge: Debt service is currently 11% of the budget. If interest rates rise sharply, that could double to 22%. Then you get a downward spiral like you saw in Latin America in the eighties, when higher debt service creates more borrowing, and more borrowing creates a higher debt service, until the whole thing blows up. At some point China, Japan, the Middle Eastern countries may stop buying our debt. There are only so many “greater fools” out there.
Note to ZH readers:
TBT went from 51.21 to 23.25 since this was published...
But wait, there's more:
Ilene: Would you be buying stocks now?
Mad Hedge: No, I sold most of my positions in June. The risk was low in March, but not so low in June, and it’s even greater now. The PE multiple on the S&P 500 has just jumped from 10 to 20 in six months. Historically, a 20 multiple is a terrible time to enter the market. Markets are discounting a “V”-shaped recovery, which we are not going to get. I think we’ll get more of a “square root” shaped recovery, a “V” followed by sideways to a gradually upward sloping grind. We’ve already had the “V”. Markets are overpriced. I don’t see how we can have huge economic growth with capital-constrained banks, catatonic consumers, and commercial real estate troubles up the wazoo. One of the only positives is the weak dollar, which makes everything we sell to the rest of the world cheaper. This is good for our multi-national companies, good for our exporters. So far, the dollar is on a grinding, controlled move down, which is good. But if the dollar’s fall accelerates, it would not be good. A real dollar panic would lead to the widespread dumping of dollar assets, and commodity prices would explode. Then we’ll get to $2,000 for gold and $40 for silver very quickly.
Ilene: You spent several years wildcatting for natural gas in Texas and Colorado, which has given you a unique insight into the energy space. What are your current thoughts on natural gas and oil?
Mad Hedge: Stay away from natural gas. The volatility will kill you. If you are a masochist, then buy it only when it’s cheap, on big dips, in the $3/MBTU range. In the last three years, thanks to the new “fracting” technology used in oil shales, we have discovered a 100 year supply of natural gas sitting under the US, and the producers have not been able to cut back fast enough. So now we have a supply glut, and we are almost out of storage. This is what took us down from $13 to $2.40 in 18 months. The lack of hurricanes has not helped demand either. Producers have been cutting back like crazy, trying to balance supply and demand, with a breakeven point of $2. They need a cold winter to help bring things back into balance. If the industry gets organized, then gas can become the 20 year bridge we need, until energy alternatives kick in. That makes me a big supporter of the “Pickens Plan.”
Oil is much more interesting. It overshot to downside in January to $32. Crude is now at $70 climbing out of the recession. Imagine how high it will get when all economies are functioning again. The financial crisis hurt the ability of big oil companies to get financing for large development projects in oil. These projects can take five to ten years to bring online. That means we will get higher oil prices sooner. We may get a pull back to the $50s, but the $30’s would be a stretch. The $32 low was an artificial one caused by a complete absence of liquidity in all markets. I don’t think we’ll see those lows again.
Ilene: Where do you see the price of oil going in the distant future?
Mad Hedge: I think it may dip into the 50s, then up, perhaps skyrocketing to $300 before dropping back down to $3 after alternatives take over and demand vanishes. But that’s at best 20 years out. If we can wean ourselves off oil in 20 years, it would be a huge accomplishment.
Note to ZH readers:
After MHFT sold stocks in June 2009, which then went from SPX 869 to 1370 , oil did not go as low as his $50 or as high as his $300 forecast:
http://stockcharts.com/freecharts/gallery.html?s=%24spx
http://stockcharts.com/freecharts/gallery.html?s=%24WTIC
Did you actually share a barf bag with Barry Obama?
Question for Johnny boy :
How much did you invest in these “gold short” trades ?
Answer :
He skipped three times his usual Friday $100 GFE , made 28% now he can afford one really good GFE for $400
Imagine how much you would have made if you had not been picking up pennies in from of a steam roller for the last 5 years and had just gone long. Keep spinnging that chamber and pulling the trigger with your gold shorting. I am sure you will eventually learn your lesson once and for all.
The problem in this reasoning is the price of gold. It will take some more time before most people realize that gold does not have a price. What has a price is a fiat currency. And it is priced in terms of gold. The whole monetary system is back-ass backward. Gold is money. Fiat currency is not. How can you put a price on money? You can't of course, at least not in monetary terms. It's like asking how many inches are in an inch. One, of course. How many ounces are in an ounce of gold?
Gold is the constant and it's value remains unchanged. What is fluctuating in all this nonsense we call the monetary system is the value of the fiat currencies.
I'd say this guy has serious gonads shorting gold. It has also been possible to make profits doing this lately with the huge volatility, yout timing just needs to be right...and you need the nads for such short term acrobatics. :P
Also may have serious issues with the truth, as a perusal of his website found he shorted bonds, gold and oil at lower prices
http://www.madhedgefundtrader.com/page/3
i see. So then these are the kind of profits where if you dont lose more money you profit? :D
3 scenarios from here, huh? Gold can go down, stay flat or go up. What an ef'n genius
Tyler please take MHFT and his self aggrandizing prose off this forum now
MHFT is picking up the slack for Leo.
MHFT is cooo . like his stories.,he like planes I like planes..
I think Gold has some serious consoldiation and therefore is headed lower
http://capital3x.com/?p=935
dollar charts are indicating a clear breakout. Gold cannot stand over exteneded period of dollar strength
Which will last until Bernake announces QE3 later this month. So if you mean "extended" period being 12 days, then ok, maybe. When the USD crosses 80 next week, Ben will have all the ammo he needs for a few trillion in easing.
The next headline from MHFT: "I shorted gold from 1820 to 2200 and made money! By the way, my dick is two feet long."
Fixed it for you:
I went long gold from 1820 to 2200 and made money! By the way, my dick is two feet short.
Anyone else think MHFT might be a kid sitting in a college class blogging about stuff he just learned from his professor?
He claimed he was a Morgan Stanley Stockbroker for 30 years and an Air Force and Commerical pilot as well as behind the scenes intel and presidential adviser. Maybe so
I've been on the fucking moon.
Twice.
I have met the man
He is nutz
What kind of a dufus would short gold?
Oh....
I'd say, "Good lay down", but you really just got lucky enough to save your ass; you're really putting the "mad" in MHTF.
so far easily the dumbest trade day ever, you know where the s and p hits basline, lets just get there so we can go long again
sounds like he might have cornered the market on doucheium, but i'm not sure how he's out muscled cheney.......
he's still long human sacrifice
Shorting gold should be just a short term trade as the fundamentals all point upwards. Very short term. Limited upside in that type of trade. In fact, the downside risk might outweigh profit potential.
I thought ZH had wised up and dumped Mad, but then the nonsense started again. Normally, I would not have read his stuff, but I had to slow down and peak at this grisly wreck of a headline. Sold short? Are you totally insane? Every jackass in the world has talked about the gold bubble, the double top, etc. When,ever, has every jackass been right? That's right, perfect record of being perfectly wrong. Gold will be a short when every jackass is jerking themselves off bragging about how their 10 ounces of gold purchased at $5000 just made them $50k overnight....or something like that....
The only down I see is the collapse of the euro and spike UP of the dollar...for a very brief moment. That could bring the shiny back to the 200 DMA and create a "back up the truck moment"..... NAH!
We bounce here between 1710 and 1920 until something BIG breaks in the world....
Hold on to your shiny....have some worthless USD "lettuce" ready to buy more!
folks, be critical, but there is no need for the langauge. Uncool.
the gold short wopuld have paid because of cme?
Pure GOLD PRICE manipulation.
...Because you decided not to be a complete idiot?
The real question you should be asking yourself is "Why Did I Ever Open That *&%! Gold Short?"
Followed immediately by "How The &%$# Am I Allowed To Post On ZH?"
MHFT:
There is not one highly successful thing about you from what we hear, aside from your ego.
KS
Youve done 3 gold trades this year, all short, and won on all of them? I think youre a big bullshitter plus an ass clown. Shorting gold while its gone from $1200 to near $1900 this year and you PWN'ed it, yea whatever.
this aussie asshat should go the way of leo..
No shit, this assface has been wrong at every turn, and then wrong again.
ask him about his blockbuster call. you MHFT have lost all credibility. the emails youre receiving are spam and hate mail from posting your buddies email on the internet.
Some people like to find gas leaks with a lighted match.
buy, hold and hide is good
Who cares what this jerk does?
exactly. NOC
"There are now three possible scenarios for the yellow metal. The double top at $1,920 holds, and we collapse to $1,500-$1,600. We continue to bounce around like a ping pong ball between $1,700-$1,900. We break out to a new high to $2,000."
You mean there are theee possible scenarios: it goes up, it stays the same, or it goes down?
Wow! That's some amazing analysis. Thanks.
+1
Technical analysis and trading in a manipulated market is silly.
Clearly overqualified for an analyst's job at CNBC . . .
trololo
hahahaha
"Double top" and "strapped on" = stop reading immediately.
Dumbass.
there was no double top, this would have required price to break below the intermediate low between the two tops.
It's ALL just noise - Buy 'n' Hide!