Gold Looks Overbought

Well, I said the FTSE could get to 5000, didn’t I?

Can it hold these levels and consolidate higher? I think it’s entirely possible. The technicals look good; we’ve rallied 40 - 50% from the March lows, and a lot of individual stocks (some of which I’ve been fortunate enough to hold since then) have done much better than that.

The last few weeks have been great for my favourite approach, ‘do nothing’ trading. I don’t mean literally do nothing, but I mean, get a position on, add to it, watch the momentum, and if it’s looking decent, let it run.

Equity Long Have Worked Out Very Well

So that’s precisely what I’ve been doing, and why I haven’t blogged much, ‘cos I haven’t changed a thing. You can look back at my blogs to see what I bought, and I’m still hanging on to most of it. Star trades include - long British Airways from 121, and added Aer Lingus recently from 0.50 EUR; long Quintain Estates and Development from 54p; and a whole bunch of auto and resources stocks including Inchcape, Ford, Aquarius Platinum. I sold and then bought back into BHP Billiton, big oilie BP and stuck with small oilie Afren and miner Anglo Pacific. Plus the ragbag of low-priced banks, retailers and small/mid-caps that I’ve been blogging about over the course of the year.

It’s an awful lot of trades to have on the go at one time, (that’s why I call my style a micro macro hedge fund), and one of the ways I control risk is by making sure I’m not running enormous position sizes. And on all the equity longs I’ve got stops in place now between 20% - 50% above the entry point, to protect my trading capital.

Some Mistakes On FX

It’s not all been plain sailing though. (When is it ever?). I’ve royally messed up some currency trades, partly because I’ve been very busy at work and I haven’t had time to monitor the trading closely. Because I’ve been away from the screen for hours at a time, I’d set some of the margins on the trades more wide than I’d normally do, with the result that I’ve blown up plenty of cash, particularly misreading the yen crosses. Big mistake! Better not to trade at all, but to be honest I’d got a bit smug and overconfident as I’ve made so much on the equities. It’s only been in the last seven days or so that the yen crosses (particularly AUDJPY and EURJPY) have behaving in a more typical way for equity rallies (i.e yen sells off). AUD has been particularly hot, on the back of the big push upwards in metals.

Gold Looks Overbought

As for Gold, I’ve got a small, cheeky short position on from $1001 (with a stop at $1011, just above the recent highs). For me, Gold has come too far, too fast - the chart looks like there’s a bit of a head and shoulders is forming, and I think the dollar could bounce from here, particularly as the data coming out of the US looks a tad more solid than some of the weaker fringes of the eurozone. Having a short Gold position is also a bit of a hedge for all my long resources trades - if the market collapses, Gold will most likely collapse with it. Although the opposite could be true - Gold might be bought as a flight to safety, though at these levels, I’m not sure what’s ’safe’ about the price. However, if the commodities rally continues, Gold could well carry on upwards - and if the dollar index breaks through its floor around 7700, then I’ll probably be looking to change my view and buy into the big push in gold up to $1030 and beyond.

In my view, it’s been dollar weakness above all that has driven the move in Gold, although there’s also talk of concerted buying by central banks, seeking to diversify currency reserves away from the dollar. The other sort-of hedge is a long USDJPY position from 9218 which will get stopped out if the cross drops below 9138 (in which case we’re looking at freefall down to the 8700 level…).

My Overall Economic View

I’m betting on some consolidation upwards in equities, a bit of a dollar bounce, and I’ll likely be looking to bank some cash over the next couple of weeks (I’m looking at cashing in the equities that are getting back to their summer 2008 levels). Oil prices are towards the top of their recent trading range, but mortgage rates are still at historic lows, with, as yet, few signs of inflation in consumer price indices, which would suggest that consumers have some room for maneouvre. Plus demand is still sluggish and inventories are low - which would suggest that there is plenty of spare capacity. High unemployment and ongoing massive deleveraging will keep a lid on things. Goldman Sachs (GS) says that we shouldn’t even be worrying too much about deleveraging.

A jump higher in both yields and oil creates the risk of a pull back, as markets worry about inflation. And if central banks start to tighten interest rates, then that’s a clear signal that the rally is likely to be ending. I suspect that as unemployment rates start to drop and jobs are added (which I think we’re going to see sooner rather than later) then we could see removal of quantitative easing and higher base rates - but I’d be looking at the first half of 2010 for signs of that. The other risk is cost-push inflation - see my earlier blog about that.

Key levels I’m looking for are an $80/barrel oil price and 10-year T-note yields above 4% as a sign that the rally might be getting a bit overcooked.

Certainly the risk/reward of being outright long isn’t as compelling as it was 2 months ago, but it takes a brave trader to fight the momentum of the moves we’ve seen since May.

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