These are the kind of days I live for as an investor since I love volatility, fear, and general market confusion. I’ve been waiting for weakness to cover my shorts and buy on dips. Well here we go, I am slowly buying the dips here in stocks.
As for gold, I feel obligated to add a small position here. We all saw how $1320 acted as a level of support several times, then $1325. Traders know where the important level of support lie: They will therefore either preemptively buy significant price levels, which means $1330 is a decent level to add, or they will break support briefly, making weak longs run for cover. If we are met with further weakness, no problem, I will add an even bigger position.
Rising Margin Requirements for Gold/Silver
The CME increased margin requirements again today. Last week they upped the margin requirements for silver; this week they have raised them for gold. What does this do? Raising margin requirements allows those trapped on the short side to get the heck out of their trades and strategically cover. Weak hands who know only how to chase markets higher get liquidated. The smart money? Well they just watch from the sidelines and get ready to pounce in the same direction as the primary trend. Shenanigans such as changes in margin requirements affect short-term trends only. All corrections in gold and silver, no matter what the catalyst, eventually pass.
I hope by now that you all have become desensitized to sharp corrections in gold. These are normal events in bull markets. Remember that the 1987 crash occurred in the context of the greatest bull market in stocks in history. Remember that a 30% correction in gold in 2008 led to a monumental rally. You should be getting ready to add on weakness. When the geniuses on financial TV start calling a top in gold, do the wise thing. Fade them.
Lost in all the noise is the fact that Treasuries are coming under pressure on down days in the market. The stock market is supposedly coming under pressure because of debt concerns in Europe. Ok, then why isn’t capital flooding to U.S. bonds like they were when Greece was making headlines?
Looking at the chart below of 30-year bonds, you can see that each successive crisis is less and less bullish for U.S. bonds. I would keep an eye on bonds: If the blue level of support gives way, then the red level of support is next. If that gives way, take that as a hint that the debt crisis is upon us in a very serious way. I strongly believe gold is going to go absolutely bonkers at those levels.
I’ve written extensively about how timing is everything. The bond bubble has been percolating for some time now, but I have refused to open up short positions. In the current crisis, there will be a direct relationship between bonds and gold. I have chosen to go long gold as an implicit short bet against bonds. Nothing is static in markets. If bonds are coming under pressure, that capital is finding its way into other asset classes. I am very confident those assets will be stocks and gold. Today may not have market the bottom in both assets, but I am definitely leaning bullish here. In the long run, these levels will look very, very cheap.