GalaTime

Gold is approaching levels it first attained in mid-2006:

Despite the wild markets in September & October, gold didnt climb too high (and definitely didn’t make new highs) - so much for it’s safe haven status. I imagine the drop to almost $700 / oz is a combination of:

• Deflation expectations - have you seen TIPS lately?
• Forced selling by hedge funds (margin calls, sell whatever can be sold)
• Demand destruction - retail sales in India dropped off a cliff, except for a short Diwali pop; I can’t imagine things will be any better in China over the next few months

FWIW, I expect gold to drop below Rs 9500 per 10 gms by next year. Of course, the huge movements in the rupee will have a major impact - imagine if US gold drops below $600/oz, and the Indian rupee strengthens to 45 versus the USD.

• Bloomberg: ITC, Larsen Among Most Short-Sold Stocks by Funds, Sebi Says

Overseas investors using offshore derivatives to invest in Indian equities short-sold as many as 2.29 million shares of ITC Ltd., the nation’s biggest tobacco company, the nation’s market regulator said.

Foreign funds lent the shares abroad from Oct. 10 to 14, the Securities & Exchange Board of India said on its Web site today, citing data from 17 funds. 

Sales in the Indian stock markets by foreign investors and their sub-accounts are possible on account of the shares being lent by them abroad, the regulator said Oct. 15. Overseas funds have pulled out $11.6 billion from India equities since January.

• Market Watch: Those bullish gold timers

According to contrarian analysis, there’s been an excess of bullish sentiment in recent weeks and months, in effect forming the veritable golden slope of hope that makes it easier for the market to decline than advance.

It’s not an encouraging trend, according to contrarian analysis, when market timers become more bullish as the market declines. That suggests a significant amount of stubbornly-held bullishness, which is just the opposite of the kind of sentiment environment that supports sustainable rallies. See Oct. 5 column

Information is in the divergences.

• Portfolio: Hedge Fund Manager: Goodbye and F— You

The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades.

I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle.

Brutal.

I was wondering last month how badly gold jewellers in India were going to be impacted due to volatile gold prices: Gold volatility - Panic!

The ATR (Average True Range) - a measure of daily volatilty - has spiked up along with the panic buying. Usually, very high volatility is a prelude to a change in trend. Let’s see. Also note that these crazy moves won’t go over well with jewellers & retail buyers in India - especially with the festival (gold buying) season around the corner.

Well, here is what Economic Times found: Gold spooks consumers, jewelers offer discount

“Dealers are offering discounts of up to 60 rupees per gram on the international prices. Diwali sales won’t be very good,” 

“People have no funds. Local gold prices are quoting below international prices by around 300 rupees per 10 grams,”

“The sales are down to hardly 10 to 12 percent of normal sales,” 

Not good. Diwali week is October 25-30, and I doubt things will improve much by then.

Gold is at its most volatile, at least over the past 3 years:

The ATR (Average True Range) - a measure of daily volatilty - has spiked up along with the panic buying. Usually, very high volatility is a prelude to a change in trend. Let’s see.

Also note that these crazy moves won’t go over well with jewellers & retail buyers in India - especially with the festival (gold buying) season around the corner.

Bespoke’s Commodity Snapshot

After the crazy volatility of last week, gold is no longer ‘technically’ oversold. With the credit bust in full swing, I find it hard to imagine new all-time highs in gold (priced in US $) over the next few months. Inflation indicators around the world have topped out, and the main bullish argument is the view that the US bailout will lead to massive ‘printing’ of dollars, and hence a bull run in gold. I have my doubts.

“Why didn’t I buy Google? Like Stalin? :) I should have listened to Dennis Gartman!” Heh.

Here’s the gold & gold miners charts:

OK, I admit you have to be a bit of a PM geek to truly appreciate the ‘re-mixxed’ video.

Here is the intra-day spot gold price action for the past 3 days:

It has gone up from $780 to $920 (+18%) and back down to $840 (-8.7%). Given the 10-20x leverage in commodity markets, there will be huge amounts of money won (& lost) this week by nimble-footed (or wrong-footed) traders.

PS: Indian gold prices went from Rs 10900 per 10 gms to over Rs 13000 and back down to 12500.

PPS: Sure enough, margin requirements were raised today; Bloomberg: Comex Raises Margin Rates on Gold Contracts by 47%, Silver 20%

The Comex division of the New York Mercantile Exchange raised margin payments on gold and silver futures by as much as 47 percent after price swings accelerated.

The margin rate for Comex members advances to $5,500 a gold contract from today, from $3,750, the exchange said in an e- mailed statement late yesterday. One contract represents 100 ounces.

The contract size is 100 oz * $840/oz = $84000. So the margin requirements went from 4.5% (22x leverage) to 6.5% (15x) leverage.

Gold had its largest one-day gain last night, up 11% and is now trading at Rs 12,700 per 10 gms (it crossed Rs 13000 during the trading day):

Pity the folks who were short MCX gold futures. Although the exchange remains open until 11.30pm, I doubt many folks here were expecting such a move. Never say never.

• BCA Research: Energy-Led Correction: Capitulation Selling Underway?

• Mint: Number of new accounts halved in meltdown

NSDL holds around 9.5 million demat accounts with securities worth Rs42 trillion. Rai admits that with the stock market meltdown, the number of new accounts opened has halved, from 200,000 to 100,000 a month.

How many investor accounts do you have? How many accounts have you frozen due to non-compliance of PAN and KYC (know your customer) norms?

As of now, we have 9.5 million accounts. Of these, 0.8 million accounts have been frozen due to non-PAN compliance.

Yet another reason to be wary of brokerage stocks.

• MarketWatch: Gold bugs’ arguments sometimes involve disingenuous logic

In recent weeks I have written several columns wondering what it would take for the editor of the average gold-timing newsletter to give up believing that gold was in a bull market. And it would appear that we still don’t know.

That’s because the HGNSI didn’t budge at all on Tuesday, despite bullion’s fall, remaining at 27.9%. To put that level in perspective, it is higher than where it stood in early August, when bullion was trading above $900 per ounce.

From a contrarian perspective, the bottom of gold’s decline will come when enough of the gold timers throw in the towel. Ironically, from that perspective, the gold bugs’ bullish persistence is extending the agony and postponing that eventual bottom.

Here’s a chart view of my attempt at a trade involving gold mining stocks, via the DSPML WGF:

As you can see, I didn’t quite catch the bottom while getting in, and didn’t quite catch the top while getting out. Factor in entry & exit loads totaling 3.25% and yet, my net loss was only 4.8%! I say ‘only’ because gold mining stocks self-destructed over the past week - as did gold - and the fund is down a further 15% after I got out.

MotS: Cut your losses!