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.
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.
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.
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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