Tuesday, November 3, 2009

Anyone Ready to Ride the Golden Bubble?

Gold is now up more than 4% over the last two trading days and showed strength during last week's equity and commodities sell-off. BUT, looking at the below chart, it is possible that "we ain't seen nothing yet".



As I detailed back in March, I have been "Ready to Ride the Golden Bubble", not on logic, but on the frenzy.

I've learned my lesson with the Internet Bubble (and recent housing bubble) that most people are illogical and invest based on fear (sometimes fearing loss, sometimes fearing they will miss out on the next big thing) and money can be made even if the premise makes absolutely no sense in the long run. As long as fear reigns supreme and equity markets remain volatile, there will be plenty of people convinced gold is the only "safe" investment.
So if the train is leaving... is anyone else on board?

6 comments:

Jake said...

All- this chart is chock full of errors, but can't revise via Iphone. Will change later this evening.

MRhé said...

Jake - As someone who is not currently aboard the train but who would like to be, I'm curious as to if you are invested in gold and how (actual metal, ETFs, gold mining shares, etc.)? If you don't mind sharing.

It seems like this gold bubble has a ways to go before it peaks.

MRhé said...

Also will you please edit or repost when you fix chart (or is it fixed now)?

Love this blog.

Cheers,
MRhé

Jake said...

Fixed!

MRhé- before I begin, let me just state that I in no way believe gold has any intrinsic value outside of a hedge against Armageddon. If you are rich, then a substantial allocation to gold makes sense... otherwise it is a gamble.

That said... how am I invested? Well, first it is important to describe my background... I started off trading options on a trading floor, thus I am drawn to otions for their gamma (i.e. parabolic payouts) and limited downside.

Those options become more attractive if you think the payout potential of gold is not "upside 10%, downside 10%), but rather "upside 50%, downside 50%".

So my positions, I am long calls on GLD (a gold ETF), offset by some shorter dated calls on the same ETF. Overall I have a substantial long in GLD, but with my gamma, I have the potential to be VERY long.

Broadly speaking....

* GLD goes down a bit or stays where its at... I lose.
* GLD rises more than a bit... I am flat / win.
* GLD rises a LOT over the next 3 months... I win BIG

MRhé said...

Thanks for the interesting and detailed breakdown, I appreciate it. Essentially you are positioned so that a price increase would earns you profits greater than a simple % correlation?

Question on the chart - I gather that your implication that there is a lot of room for gold to run up is because that we still have relatively low YoY change despite all-time high in price per ounce?

(I'm a bit of a novice with this stuff.)

Jake said...

history does not necessarily justify any future price, but is shows how out of hand prices can get and how quickly. between this chart and the one in the link through in this post (my old post on bubbles), we are not even remotely at a level indicative that the bubble has run its course

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