Having received many emails and comments asking a variety of questions regarding the markets recently, we are going to do our best to briefly outline where we should go from here.
Firstly, what is happening?
An immense amount of our financial system is built on credit, credit that is now rapidly deteriorating. This is causing a sell off in just about everything, regardless of the fundamentals or technicals of the assets in question. This has been seen to a great extent in gold stocks, with many being sold down to the same prices they were when gold was $500/ounce. Think of the markets as people standing on a carpet rug, and the rug has suddenly been ripped from underneath them. Everyone falls down.
This “mass exit” from just about everything has caused a rally in the USD, since most of these assets are dollar denominated and therefore there is a strong demand for dollars from investors wanting to get out of positions.
The greenback spike has also been caused by non-US central banks cutting interest rates. The feeling is that many central banks will continue to cut rates, but the US is limited at how much more it can cut its interest rate, since at present it stands at only 1.5%. The same goes for Japan, which is why both the US dollar and yen are experiencing sharp rallies.
The rally in the greenback and the withdrawal of credit from the system has caused commodities in general to also fall, reducing inflationary pressures and therefore the need to own gold as an inflation hedge. This has damaged the saven haven case for investing in gold and gold stocks.
There is also the deflation/inflation debate surrounding what kind of a recession we are going to be in for. We are of no doubt that the vast amounts of money being pumped into the system will cause serious inflation worries, but the question is when? If everyone is prepared to just sit on cash for a year, the inflationary effects of the massive cash injections by the US and others will not be felt for a year. Also investors will probably keep moving into US dollars and yen while other currencies can cut interest rates and devalue their currencies more than the US and Japan. Perhaps when every major central bank in the world has rates of between 0%-2%, investors will then move to the currencies of the country’s that are in the best economic shape, and that is definitely not the USA.
Our stock positions have been hammered, we feel the pain too since we hold all positions that we recommend.
Our option positions have similarly been slaughtered, but we have had a number of 100% option wins this year to counter balance the losses, so we are about even on our options trading operations this year.
Currently we are holding our positions in our gold stocks, gold options and cash. There are a few events that need to pass before we make a decision to either reduce our holdings or increase them. First up is the US election and the weeks that follow it, these will no doubt be critical to the markets. There is also the issue of the December gold contracts on COMEX, and whether the sellers will be able to deliver the gold they have promised.
Once these events have passed, we will make decision on whether we are going to hold, reduce our position or back up the truck.
Until then, we will sit tight.
Footnote: We are looking at an options strategy that could provide some income during these volatile times, essentially betting on volatility. We will publish our ideas for discussion shortly.
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