I have a confession to make – I’ve shorted gold

Gold has turned

Do you like contrarian indicators?

If so, I’ve got a corker for you today.

Last week I sold gold – lots of gold…

Am I doing an Alan Greenspan?

The idea behind contrarian investing is that you take the opposite side of the trade to the herd. When sentiment is wildly bearish, you should be bullish – and vice versa. When the stock market is roaring upwards to the extent that a notorious bear finally throws in the towel and cries “Buy!”, that’s the point at which you should sell – because there will be very few buyers left to come to the market.

There’s also a more comic form of contrary investing – where you take the opposite side of the trade to someone who is notoriously off in his market calls. Former head of the Federal Reserve, Alan Greenspan, is a great example.

In 1973, he said: “There is no reason to be anything but bullish now”. The market peaked that month, then crashed. In 1996, Greenspan famously warned of “irrational exuberance”. The stock market didn’t stop rising for another four years. In 2000, Greenspan fully embraced the internet productivity miracle. And we got the dotcom crash. In 2006 he declared: “Housing prices won’t fall nationally”. Prices were one year into a five-year free fall.

So the fact that Dominic Frisby, possibly London’s last remaining gold bug, went short might be interpreted as an extremely bullish sign. But before you jump to conclusions, let me explain what I did – and more importantly, why.

Why I’ve hedged my gold exposure

It all boils down to one simple moving average: the 144-day simple moving average (144-dma) – ie the average price of the last 144 days. I’ve written about it many times before in this column. (Though I was the first to give the 144-dma broad coverage, it was actually the discovery of the Hong Kong trader Michael Hampton. Others have since laid claim to it, but Mike was the first.)

The chart below shows gold since the crash of 2008, with the 144-dma underneath in red. I have no idea why, but for some reason, every time gold corrected during its bullish run from 2008 to 2011, it found support at the 144-dma. In other words, it marked an excellent entry point.

Now that gold has turned and entered bear market territory, the 144-dma has now become resistance. In other words, bear market rallies are petering out at this level.

Gold price and 144-day moving average since 2008

Source: StockCharts.com

As you’ll no doubt know, I like gold. I think the world would be a much better, fairer place if money was somehow tied to gold once again. Heck, I’ve just written a book that swallowed up about 18 months of my life that espouses on this theme.

But it doesn’t matter what my opinions are. Gold, sadly, is in a bear market and that’s all there is to know.

However, I didn’t go to my remote Scottish highland location – or is it the Yorkshire Dales? I can never remember – walk ten paces east of the old oak tree, get out my spade and dig up my buried treasure, before taking it down to the coin dealers. I’ve no plans to do that any time soon.

I just made use of the evil trading vehicle that is the derivative.


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Last week, gold returned to the 144-dma at just above $1,360 an ounce. It was just too obvious and too simple a trade. I shorted it at said moving average, with a stop just above. Lo and behold, gold bounced down off the 144-dma. I’ve now moved my stop to below my entry point so that I can’t lose money on the trade.

I’ve zoomed in on the above chart below. Here we see one year of gold, with the 144-dma in red. I’ve circled the entry point in blue.

Gold price and 144-day moving average in the last year

Source: StockCharts.com

I’ve got a target of about $1,225 on this one, and if gold keeps on trending lower, I’ll keep on moving my stop lower to protect any gains I might make. As I say, I’ve already moved my stop to below my entry point, so I’m bullet-proof on the trade.

I should say, this is a trade I couldn’t be more grateful to be wrong about. The sooner gold starts rising again the happier I’ll be. And I’d like to think gold’s time will come again.

In fact, I’m sure gold’s time will come again. I don’t think we’ve had the full consequences of all the monetary debasement that has taken place. But for now, while the market winds are against, I’ve hedged my gold. And, to be blunt, I’ve been far too slow to do so.

How will we know if gold’s time is nearing? Well, for one thing, it will get above the wretched 144-day simple moving average. One positive sign is that at least said moving average is not falling as steeply as it once was.

Now I’m bracing myself for the comments…

PS Finally, for those that supported Life After The State, it is now back from the printers. I am so sorry it has taken so long – you have no idea of the complications we had with it – but it should be making its way to you now. The digital version will be released in the next couple of days. And the El Cheapo trade version can be bought at Amazon here. Order your copy now and help save the world from governments and banks.

The official release date is actually Thursday, but apparently orders made before the release date mean the algorithms move it up the rankings – or something like that – so you’ll be doing your bit for the revolution. Does anybody know Russell Brand well enough to send him a copy?

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35 Responses

  1. 06/11/2013, Mutatu wrote

    I did hedge my gold back when it was up around $1700 and felt a bit frothy, unfortunately (OK maybe luck did not have anything to do with it) I started to see quite a loss on the hedge and as soon as the hedge was back in the black I covered it. Story of my life selling too soon.
    For those of us who hold gold as an “insurance policy” hedging using spread betting when gold gets ahead of itself (I know that is the hard part, deciding when) could be quite useful. Thanks for the article, I did follow the 144MA on the way up, I did not think to use it in the correction.

  2. 06/11/2013, Paul Claireaux wrote

    I never cease to be amazed at the belief in various technical indicators. Surely we can fit lines – straight or DMAs of various durations – to any chart we like AFTER THE EVENT.

    I’ve heard it said by tech analysis believers that the ‘trend is your friend till the bend in the end’ (that’s the oops bit in your chart)

    I prefer to say that ‘if you follow the trends they’ll send you round the bend’

    Good luck with this astrology !

  3. 06/11/2013, paul wrote

    Hi Dominic,

    I’ve no issue with a gold bull selling/hedging gold. To date it looks a good trade for you and is probably a sensible option. There may be good reason for this but surely announcing a trade AFTER it has gone onside for you does scream of a pretty basic sales tactic.

    How many times have you shorted gold and it has failed?
    what is the point of advising readers of the trade after the event?
    surely you must have known you were looking to do this at the 144ma so why didn’t you prep you readers?

    thanks,

    Paul

  4. 06/11/2013, Cal wrote

    How long will it take for you to accept your cherished 144 day moving average model is well and truly broken? Yes it appeared to work well when gold was climbing but since then the line has been repeatedly breached. Now on the basis of just a few months data you declare the theory has been turned on its head and the line now marks the highs instead of the lows. It makes no sense, it is time to let go.

  5. 06/11/2013, tuesday wrote

    You are right Dom- that is the contrarian indicator I have been waiting for!
    If you’re out – I’m back in!

    But hold on a minute, I thought MW recommended holding Gold as Insurance. You are swing trading with your insurance policy?!

    And didn’t I get a bunch of inducements to buy your colleague Simon Popple’s tip sheet on Gold miners this week? Could have sworn he said it was going up!

    Up, down, insurance, investment, speculation? Keep it coming!

    • 08/11/2013, Inquisitor wrote

      CXOAdvisory recently released a series of articles on ways of diversifying portfolios so as to protect oneself if stock markets come tumbling down. Gold is best amongst precious metals for its low correlation with the stock market, but so are various forms of real estate, like agricultural land. They note their research doesn’t compare portfolios with and without gold holdings, but it is safe to say that holding some gold (and silver, and if one is so inclined, palladium and platinum) is a good way to diversify. And if fiat currencies are anchored to gold, this will further boost its value.

  6. 06/11/2013, Rajah Brookes wrote

    In a weird way I think yours is the only solution to the manipulation issue. Manipulation has only been possible due to the repeated recruitment by gold bulls, of fresh meat to the slaughter. In a way the perma-bull analysts have only been doing JP Morgans bidding by constantly using the phrases ‘going to the moon’, ‘explode upwards’ etc etc. Every time another round of suckers are told it can only go up and are drawn in long, JP Morgan use their infinite ability to sell naked shorts and push the price down again fleecing the longs. It’s like a gigantic money pump taking energy from a prevailing wind. But only possible due to the constant supply of small gold longs. If we all join them on the short side the game is up! (Mind you aren’t JPM net long now? I fear you may have turned short too late Dominic!)

    • 08/11/2013, Inquisitor wrote

      What makes you think the manipulation is on the buy side?

  7. 06/11/2013, JW wrote

    Got my “Life After The State” delivered this morning. Looking forward to getting into it. Will you be using the gains from your short trade to buy more sovereigns to bury?!

  8. 06/11/2013, Chris N wrote

    There are lies, damned lies and statistics ! – but one thing is sure, the 144 day ma will start to rise over the next few weeks as all those sub 1300 prices from late June/early July fall out of the average. Looks to me as though you could superimpose Oct 2008 over Sept 2013 in your graphs and we would be at the start of a period when the 144 ma is touching all the lows again. My guess / prediction $2500 by Dec 2016 !

  9. 06/11/2013, Jimmy O'Goblin wrote

    Dominic,

    Best of luck with the short. We are in the timeframe for gold to put in a major bottom… some say it will hit around $1000 to $1050. As we know, such levels, when Mr Market is looking for a figure, are never reached. Think about the $2000 certainty in 2011. It didn’t quite make it.

    The June $1187 may have been the low point. Time will tell, although I will be amazed if it doesn’t hit that low again. I think it should occur when the Federal Reserve begins to taper those bond purchases. People will dump gold. Some will think that rising interest rates will put paid to economic recovery. Others will believe that ‘normal’ economic conditions are returning without inflation. Hence, no need for gold. Judging by the market’s reaction recently to the thought of tapering, equities look set to decline as well.

    This fall in gold and equity values will be a fantastic buying opportunity. When the bond bubble bursts, all that money will need to find a home. Asset prices will skyrocket. We will enter the period of high inflation that the US and British governments so badly need to wipe out the debt burden. It will be like the 1970′s all over again.

    How do I know that gold is bottoming at this moment? Well, despite MoneyMorning journalists believing they are ‘contrarian investors’, I can prove to you that, in the case of gold, at least one is certainly not.

    Take a look in the MoneyMorning archive and read John Stepek’s article written on the 15th September 2011. In no way do I wish to embarrass John; he has made some good calls on Italy and Japan. However, in this article, written during the height of the Greek crisis, he says that buying gold is the only investment worth considering. What a massive sell signal! Those in the know were selling their gold to wealthy Europeans who were expecting the Euro to collapse. Gold has fallen even since John wrote that piece.

    And now, Dominic, you are shorting! Food for thought.

    Best wishes,

    JOG (Throw that spade away and KEEP YOUR SOVEREIGNS)

    • 08/11/2013, Inquisitor wrote

      Indeed, the taper may be the next big buy opportunity. Gold still looks expensive to me.

  10. 06/11/2013, Marko wrote

    These articles do my head in.

    This is the guy who’s tactic during the up tick was to buy more every time it hit a certain higher target. Yet on the way down it’s shorted.

    Surely it should have been sell on the way up and buy on the way down.

    I wish I had never bought my gold mining shares which are basically offsetting all the profit from the rest of my portfolio but there has been so much damage now they are basically a bad investment to hold for the long term.

  11. 06/11/2013, tuesday wrote

    Well to be fair to Dom at least he is sort of acknowledging his turn around – probably should have done it some time back though.

    Jimmy O Goblin makes a very good point – also sorts of predictions and tips are made in Money Week and then quietly forgotten when they are proved wrong. What about the Euro, the property market and the pound?

    John Stepek, Tim Price et al. love to take the politicians and bankers to task but they exhibit a huge lack of accountability and honesty when it comes to themselves!

  12. 06/11/2013, elevator wrote

    Ramper!!!

  13. 06/11/2013, elevator wrote

    All those emails bristling with expertise;…All those the graphs!! …the interminable nonsense …the unending stream of bullshit… all absolute garbage….all those months of devoted attention… and now just as all his loyal disciples are weighed down with Physical, ETFs etc. the revelation that ..er…’Actually, I’ve just sold mine..er..just before I sent this email to be honest!!’
    Experts!!….who needs them?

  14. 06/11/2013, Rabster wrote

    Rather like the old Communist Party political apparatchik the revisionism continues although I think MW will now assume that the about turn on Gold is complete.

    It is not that the advice resulted in losses , after all we are all grown ups and accept responsibility for our own decisions, it is the smugness and hysteria with which MW led us up the garden path and made Gold the backbone of their defence against the all impending doom!

    Dominic and others at MW keenly awaited their ‘schadenfreude’ moment.
    Unfortunately, MW you became what you mocked …a hysterical, fear inducing and greedy bunch of people.

    Now that the bloodletting is complete can you please go back to the quality publication you were and advise us on how to deal with the long drag down that continues .

    P.S. So we can assume that Dominic will not be producing any more Gold Reports.

  15. 07/11/2013, Oscar Foxtrot wrote

    Good luck to you Dominic BUT why didn’t you share this insight with the rest of us before you took action? If you are writing for a publication which offers ‘advice’ why keep your trades to yourself – hearing about your successes after the event is of little use.
    Dominic Picarda in Investors Chronicle offers very specific advice about when to go long and short. I know he is a technical analyst and that is what he is paid to write about but at least the information he offers is of use prior to the possible event.
    Regards from a disappointed subscriber.

  16. 07/11/2013, Paul Islington wrote

    I am nor sure I get the technical analysis looking only at a dma144 – before we get to your target of $1225, I see $1275 as a major support, which coincides with the bottom of the W and the upward trend (line support the 1200 in jul and 1250 in oct).
    And that’s before you look at indicators… Shorting at this level might not be the safest bet – unless it’s for hedge purposes only.
    Shorting below $1275, appears to make more sense for the short term. IMHO

  17. 07/11/2013, Changing Man wrote

    Surely the DMA 144 is nothing more than a trace of average historical movement? It is always going to trail the prevailing movement, i.e. when the movement is down, the DMA will lag by catching the tops and when the price rises it will lag and catch the lows? It simply can’t be used to predict future movements.
    Better admit that you havent got a clue what direction the price is going. Still, you are fireproof now. If the price falls you will be right with your hedge and if it rises you will be right with your original gold investment. For sitting on the fence, read hedge!

  18. 08/11/2013, S L Watson wrote

    If Dominic was a scientist, he’d start with a hypothesis (based on some model or some notion of causaility) and then test it against the data, using appropriate statistics to give a confidence level. But he’s not, so he takes the data and then tries to fit all sorts of things against it until he finds one – the 144 dma – that sort of seems to work. An undergraduate student in a science discipline who presented that to his class would be laughed out of the room. The point is that if you try a hundred different ways to interpret data, you’ll always find some that look convincing, just by chance. Scientists are taught that. Maybe economists aren’t?

    • 08/11/2013, Inquisitor wrote

      That is one way of doing science, but open any philosophy of science book and you will note it isn’t the only one.

      Of course, what Dom presented is how many “scientists” and “experts” do science anyway – retrofitting data to particular hypotheses. Economists are particularly guilty of this.

  19. 08/11/2013, uncommercial wrote

    Gold is an illiquid commodity that is costly to hold, with large existing stocks relative to its actual uses. Overlaid on top of that is a huge amount of superstitious speculation. You can gamble on momentum in the gold market if you want, all the rest is hocus pocus. Economics doesn’t really come into it.

    • 08/11/2013, Inquisitor wrote

      Economics will come into it. The problem is timing it. One can bury one’s head in the sand and insist it won’t. Central banks and their overlords are good at delaying the eventual crisis that will hit if investor faith in bonds collapses. There are many potential triggers.

      What better inflation hedge do you suggest?

  20. 08/11/2013, Baxter Basics wrote

    Disclaimer: None of the following should be regarded as financial advice. It is intended as information only and one should do their own research before making any purchase.

    The challenge is, of course, to find the market bottoms – to “buy the dips”, so to speak. To buy low such that one can later sell high. Nevertheless, market timing is notoriously difficult and trades can go against you. The trick is to identify when the odds of a successful trade are in your favour. Typically we use fundamental ratios to do this.

    Other asset classes such as stocks have a plethora of fundamental ratios such as (P/E, CAPE, P/BV, earnings per share and ROE) with which to estimate a fair value and judge whether they are over-or-under priced by Mr. Market. Gold has no such ratios. Its price is purely a function of prevailing market sentiment.

    Consequently, the only guide we have to valuing gold is historical price data. It ain’t perfect but it’s all we have. In other words, technical analysis (all these graphs and the patterns they exhibit) is all we have to assist us on purchasing and selling decisions. And if no-one could consistently make any money trading gold then there wouldn’t be any demand for it on commodities exchanges. So it *can* be done if one knows how, and one remains flexible in one’s methodology – discarding those indicators that no longer seem to hold true and always looking for new patterns that emerge.

    As well as moving averages of prices, one should note the moving average of volume (the amount of trading activity). Google Finance can overlay this graph on the volume portion of the historical gold chart. The 144-day moving average (a good general-purpose smoothing function) of volume is just hitting a trough at the moment; historically a (roughly month-long) rise has consistently been observed following these troughs. Again, this is generally strongly correlated with a strong rise in the price of the gold.

    Bearing this in mind, it’s worth noting that an inverted head-and-shoulders pattern is forming on gold which is coupled by an inverted death cross on the 288 and 72 moving day averages. This is a VERY strongly bullish signal and historically suggests a very sharp rally in the gold price over the next month.

    December is the month of giving gifts. Many people (particularly in Asia) have a long tradition of exchanging gold jewellery at such times which suggests a short-term rise in the price of gold.

    I expect gold to start making serious rises any time from now until mid-December, and I’m buying some via exchange-traded funds (ETF) as we speak.

    Actually, I’m just making this all up as I go along, but I’m now starting to believe my own BS – which is always a big warning sign. Hey, I didn’t even mention the Frisby contrarian indicator [oops, oh well]. Can I apply for a job at Moneyweek? I tell you, we could make a tidy sum on “The Baxter Report”. What are the hours like?

  21. 08/11/2013, haircut wrote

    crikey, maybe i’m wrong,but i think you sound a bit out of touch with reality.
    perhaps you think people will be really impressed with your incredible dealing expertise/prowess, in suddenly shorting gold, which you tell all after the event.
    i wonder how those people who listened to your advice on buying gold /gold miners over the last few years feel. perhaps they are sitting on big losses and feel like they have been led up the garden path and with this article feel like you are rubbing their noses in it!!
    just an observation. personally i wouldn’t be interested in anything to do with tech analysis hocus pocus and read MW for entertainment only, but feel sorry for those poor folk that listened to you and MW (and apart from losing a lot of dough in gold, also missed out on an incredible bull market in stocks.)
    shocking!!!!!

    • 08/11/2013, haircut wrote

      Whats the old expression?

      ‘Don’t know anybody that made much money using technical analysis, but know quite a few who made a fortune selling books on it’

    • 09/11/2013, haircut wrote

      Observing my comments from last night and they look like a lot of sentimental mush (never post when you’ve just got back from the pub)

      What I meant to say was ‘Hey Dom,don’t worry about all those sad sacks, never give a sucker an even break’

      Ha !

  22. 13/11/2013, Dominic Frisby (the author) wrote

    Folks,

    I write Money Mornings on a Tuesday and they are published on a Wednesday. The day an article is published does not and cannot always coincide with the day I make a trade.

    In this case I placed the trade the day after I had written a MM on oil. I then mentioned it in the very next article I wrote the following week. It is not possible do any more than that.

    I made a strong suggestion 2 weeks previously that gold’s rally would peter out at the 144dma – http://moneyweek.com/whats-next-for-gold/ – and that’s exactly what it did.

    Heck I get a lot of calls wrong, that’s why I’m obsessed with managing risk, but I’m not aware of any other commentator who nailed this particular call as precisely as I did.

    Thank you for all your comments.

    Dominic

    • 21/11/2013, haircut wrote

      Captain Flynn

      ‘I’m not aware of any other commentator who nailed this particular call as precisely as I did’

      Dommy you remind me of the hapless Captain Flynn in the children’s Skylanders Giants X-Box game. No matter what happens he always finds a chance to ‘big himself up’

      I’m still waiting for gold at £10,000 an oz. that you were tipping 24/10/12 or maybe you had your chart upside down?????

  23. 13/11/2013, Cross Country wrote

    I use technical analysis. Some of the greatest traders in the world, with long-term (20-30 years) verifiable track records are technical traders, applying a rigorously tested approach to risk and money management. Different approaches work for different people.

  24. 18/11/2013, flier wrote

    At least Dominic does reply, unlike John Burford, from who I have never seen a reply, whether to defend his position or even worse, to respond to a question posed by a subscriber.

  25. 20/11/2013, astrogeezer wrote

    I’m a contrarian too. Whatever you recommend I will do the opposite. Stick to your stage performances and leave investment recommendations to grown-ups.

  26. 20/11/2013, charteye wrote

    Dominic has evolved into a short-term swing trader. There is a lot to admire in this strategy whilst still holding to the view of a gold bug.

    All successful trades will help buttress his account and his reader’s confidence in gold’s economic significance.

    • 20/11/2013, haircut wrote

      There might have been a lot more to admire about his strategy if he had used his fancy charts to say to short gold at $1900.
      Perhaps he was waiting for a trend to develop before shorting?
      $1900 down to about $1300, now that’s what I call quite a trend !!!!
      Regarding reader’s confidence, people still seem to stick up for him, maybe I’m missing something?

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