Buy Sensex, Sell Gold
I think this is an opportune moment for a pair trade: Buy Sensex (or Nifty via NIFTYBEES) and sell gold (short GOLDBEES - in theory - or short a gold future).
Why?
- Indian equities are way oversold (unusually so for 2002-2008 period, except in May ‘04)
- Gold is overbought (but not drastically)
- There’s fairly high levels of fear in capital markets (NSE VIX has remained above 30 for a while, and spiked to 49 yesterday)
- My historical analysis shows that the performance of the Sensex-Gold pair is close to a turning point
- Because no one else’s crazy enough to do it!
I admit that this may be a bit early (say 5-10% more to go on each side), but if I look at a time frame of ~2 months, this pair trade looks mighty attractive.
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July 16th, 2008 at 10:25 pm
Kaushik,
I think these are two different trades rather than a so-called “pair trade” (but that’s a theoretical question). By the way, what do you base your oversold rating for the Sensex on?
Regards,
Max
July 17th, 2008 at 8:06 am
Max,
Yes, it’s not a pair trade in the stat-arb sense, but as you said - it depends on how you define one.
Oversold rating for Indian indices - a combination of a modified P/E ratio, deviation from multiple moving averages and VIX.
Cheers!
July 17th, 2008 at 12:32 pm
We love optimism!
I wish you are correct and no more corrections on the markets!
July 21st, 2008 at 1:12 pm
Hi Kaushik,
I am new to the gold investment zone. Can you tell/guide me to a plave where I can figure out how to “sell” gold? If I short GoldBees, am I not supposed to square off the position by the end of the day? Is there a place where I can go short for a longer period?
Ciao!
July 21st, 2008 at 6:38 pm
Jose,
Yes, you can’t hold a short position in GOLDBEES - hence the phrase “in theory”
The only option is to short a gold future on the commodity exchanges - MCX or NCDEX.