Kick Em’ When They’re Down: Miners Spend Billions to Wipe Out Bad Gold Hedges
September 16th, 2007WARNING: This is not a recommendation to buy, sell or hold any financial instrument.
This might indicate that speculators will enter the market to bring the hammer down upon the big players who got caught short, squeezing prices much higher.
If you’ve ever seen a nature documentary that shows how lions move in to attack injured slow/weak/old prey animals, or sharks in a feeding frenzy, you know everything you need to know about this type of move.
Gold longs, brace yourselves. I don’t know which way it’s going to go, but it’s going to be rough. Ahhh, it’s so nice to be holding steady, or accumulating on dips, and not trading this.
TRADING
For those of you who know better but do it anyway: Look for higher lows that describe an ascending triangle. If you’re already in, hold on, it’s make or break time. If you’re thinking about getting in, this is a really rough gamble. Consider taking a position that is much smaller than you originally intended to take and then average in over time. Therefore, if gold continues to rise over the $721 resistance, you will have caught some of the move with your smaller position. If it breaks back down into the $600s, you get to buy more with the capital that you kept off the table initially.
A Note on Chasing:
“When you start a fire, be to windward of it. Do not attack from the leeward.”
—Sun Tzu, The Art of War
Bad trades happen when you’re on the sidelines and feeling down about missing out on a strong move. Resist the urge to chase the move. Many times, when a breakout higher occurs, there will be a substantial pullback downward toward the previous high. Wait for the pullback. This is where your degree in horse shoes and hand grenades will come in handy.
“But a pullback in what interval? Minutes, hours, days, weeks?”
I’ll just say that in addition to that degree in horse shoes and hand grenades, you might find that flinging some chicken entrails against a clean, white wall will be helpful to your meditations on this topic; or not.
In other words, are you buying a dip, or catching a falling knife? If that question stands your hair on end, causes your pulse to quicken and/or makes your hands sweat, you’re gambling with too much of your hard earned money (or the house’s leverage).
Like I said, I’m glad I’m not trading this. I bought a couple of grams this morning because it was down; simple as that. No chicken entrails, multi period stochastic oscillators or beads of sweat.
PHYSICAL DEMAND
I don’t know if it’s representative of the wider situation at all, but some Cryptogon readers have been buying A LOT of metal on BullionVault lately. Tens of thousands of dollars worth of gold. BullionVault purchases don’t represent paper contracts, but actual, physical gold. I really wonder if we are at a point where physical demand from people looking to diversify their portfolios could cause the thing to breakout higher.
IN OTHER NEWS: THE PANICKED HERD
How many bank runs will the herd endure before it looks for alternatives?
I have previously identified many problems with the assumptions on gold, but I went with it mostly because I didn’t see much of a choice. But then I thought about people who will come to the game late, in a panic. I don’t think the herd will be debating the finer points of gold as it becomes clear that the wheels are coming off the cart. People will look for something, anything, that seems to provide security as the paper based institutions fail them. Gold is the obvious vehicle, regardless of its flaws.
DOW THEORY, THE MAN ON THE STREET AND GOLD
I know this won’t sit well with many gold bugs who’s mantra is “never sell,” but you should carefully consider your positions if we reach the point where the man on the street is sure that gold is the way to go, mortgaging their houses to buy gold, taking cash out of their credit cards to buy gold, because, “it’s a sure thing.” The “smart money” uses times like that to sell. We’re nowhere near that point, but as the banks begin to die, we could find ourselves there very fast.
I’m not saying to go one way, or the other. The results, good or bad, are your responsibility, but look into the phases of trends described by Dow Theory. In very broad terms, we might be about to enter into the “public participation” phase of gold.
Via: Reuters:
Gold miners are spending billions of dollars to unwind gold hedges taken out at prices well below today’s heady levels of $700 an ounce and more, underscoring the risks in trying to predict bullion prices.
“I’ve been in the mining industry long enough to know that all commodities are volatile,” said Ian Smith, managing director of Australia’s largest home-grown gold producer, Newcrest Mining Ltd and a former Rio Tinto executive.
Newcrest this week was forced to dilute its stock and offer A$2 billion ($1.6 billion) in new deeply discounted shares to pay for closing out 4 million ounces of hedge contracts assembled a decade ago when gold was much lower and no one believed prices would rise to current levels.
Investors are favouring gold miners such as Newmont , Barrick Gold, and Harmony that have cleared away most hedging, to better weather any fallout from the U.S.-induced debt crisis.
Hedging guarantees that miners get a minimum price for their products and essentially involves the producer agreeing to sell some or all of its output at a set price over a period of years.
While hedging can protect a mining company against price falls, it also means they can miss out when the market rises.
The spot price of gold has jumped more than 55 percent in the last two years, as global investors have diversified their portfolios beyond traditional stocks, bonds and currencies.
Gold/S&P 500 early 1980s = 4, current ratio = 0.5
Dow/Gold 1932 = 2, current ratio = 20
house in gold oz, historically = 100, now > 300
In price ratios this gold cycle has a long way to go. Who knows what timescale will be required to get there?
I’ve been wondering what to do with my small stash if prices start going high (let’s say $1000 an ounce or more).
I was lucky – I bought 50% at $470, 20% at $550, 20% at $640, and 10% at $730 (last year…oops!)
Overall, a nice “paper profit”, but I bought as a hedge against the kind of bank mayhem we see today. It makes me sleep a lot easier.
I think if I had to make my original paper investment back by selling ~50% of the gold, that would clinch it. Hold the rest in case the bugger keeps rising. I’m no financial guru, but I’d find it hard to hold that tail indefinitely.
BTW, Washington Mutual’s online banking has been down for ~8 hours today (Sunday). That’s not a good sign. If it continues into Monday, I’ll be very suspicious.
Assuming that the PTB have engineered the current economic situation in order to seperate Joe Average from his McMansion and generally rob the middle class of their wealth, would it not then make sense (from their point of view) to somehow take advantage of the fact that people are going to be turning to gold in a crisis?
I’m guessing the standard pattern is Joe Average to not jump on this sort of bandwagon until the end of the run – and that we’re not yet at that position.
This is pure speculation obviously, and I don’t know markets but I think the assumption that the PTB would choose the most evil option is probably pretty safe.
Here’s a question I forgot to ask. If the bank’s are dying and you want to sell gold, what in the hell do you put the money into?
I know, I know; guns, tools, sacks of wheat etc. Is any bank going to be safe?
@ Alek
“In price ratios this gold cycle has a long way to go. Who knows what timescale will be required to get there?”
Absolutely nobody knows. The rhetoric about gold sounds much the same today as it has for the last 20 years. What’s different about now is the price action on the chart.
@ dermot
“Hold the rest in case the bugger keeps rising.”
In my experience, losing sucks. But what sucks almost as bad is taking profit and then watching the thing go on to double from where you sold. Letting a piece ride is just good management.
Please don’t think I’m drawing comparisons to speculation, but traders will often take on multiple units/blocks of shares, etc and unload them at various points along a profitable move. This locks in profit and reduced exposure, while letting a winning trade ride. (Easy to write about in theory, not so easy in practice.)
I think the best indicator to know when to really watch out will be, as I said, when Walmart shoppers start wondering about gold.
@ Aaron
re banks: Banks probably aren’t going away and there will be national currencies. Unless it’s Mad Max, which it could be, you would convert the gold into whatever fiat script / coin of the realm thing that rises from the ashes. See Paul Tustain’s response to an email from me, if you’re interested:
https://cryptogon.com/?p=525
And, Dermot, thanks for the info re: Washington Mutual.
just FYI, WAMU usually is down on sunday. However, recently they have been bouncing some checks they shouldn’t have, so I am gonna be moving my funds elsewhere very soon.