Portfolio Update: Bought More Precious Metals

This is a guest post. Source of Article

Please note that this post are a little outdated due to recent holiday break. Usually I try to update the trades opened within the 24 hours from execution, but in recent times I haven’t been anywhere near the office (apart from an hour here or there). I did open two new trades just before new years eve, so here is the update as well as brief thinking process.

Chart 1: Gold has shown incredible relative strength during USD rally!

Gold vs US Dollar 

Source: Short Side of Long

Unless you have been living in a cave or under a rock, you surely would have noticed the amazing strength US Dollar has been showing in recent months. Whether its against the majors like the Euro, the Yen or the Aussie; or EM currencies such as the Ruble or Real, the greenback has been making up some serious ground.

If we observe Chart 1, we should be able to see four major global macro asset classes: S&P 500, Treasury Long Bond, USD Index and Gold. Let us not focus on the stock and bond market for a second, and only pay attention to the recent action in the US Dollar (inverted on the chart) and Gold.

Majority of the time, negative correlation between the USD and Gold is high. So in plain English, usually but not always Gold moving up means US Dollar is moving down, and visa versa. What should grab all of our attention is how powerful the recent USD rally has been and yet Gold has held its own (observe the blue box in Chart 1).

Chart 2: Price is compressed in a technical triangle and its decision time

Gold COT 

Source: Short Side of Long

The fact that Gold has barley sold off and still remains above $1,200 per ounce, similar price where it traded 18 months ago, indicates relative strength and buying interest. Other commodities, such as Crude Oil, have not been as lucky with greenback moving up so high. Eventually the US Dollar rally will pause and take a breather, because nothing can keep rising vertically forever. It is my view that Gold will outperform when that time comes.

Now… most trades would like to know when that will happen? Because I do not have a crystal ball, I cannot answer that question like other so called “experts”. But what I can say is that the current price action in Gold shows a major compression in the form of a technical triangle. This pattern is edging closer and closer to a break in either direction, which should give us further clues (refer to Chart 2).

I believe this break will be on the upside and I recently purchased some Gold via an ETF (NYSE Symbol: GLD). Depending on how the price behaves, this could either be just a short term trade or a longer term investment.

Chart 3: Miners have been terrible performers since 2011 & appear cheap

Gold vs Gold Miners 

Source: Short Side of Long

Furthermore, Gold Miners have become extremely oversold and now trade at dirt cheap valuations. When compared to the Gold price itself, miners trade at the biggest discount since 2000… around the time last major precious metals bull market started (please see Chart 3). This is even more true when we look at Gold Mining Juniors (NYSE Symbol: GDXJ), which are down by almost 89% from the highest high in late 2010. I’ve started a small position here to test the waters (similar to Russia and Uranium if you refer to Chart 4).

Also worth an important mention, I have closed my major hedge on Silver, which was originally opened in early July of 2014 just above $21 per ounce. This was one of my biggest trades in recent times and a gain of 24.5% is really really huge.

I plan to use these profits to purchase more PMs and average down my previous positions which sit under water. Moreover, despite a huge rally in the US Dollar, I will continue to hold all my cash in this currency for the time being. My shorts on the Aussie Dollar also remain in place for now. Finally, only other position I have opened recently is the Chinese H shares bet, but more on that in another post.

Chart 4: Recent additions to the portfolio are PMs & Chinese stocks

SSOL Portfolio 

Source: Short Side of Long

Disclosure: Biggest trades in the portfolio are long Precious Metals, long Chinese equities, short Australian Dollar and finally cash held in US Dollar currency.