4/12/13

With today’s break below the key 1522 level, gold is highly vulnerable to a very ugly unwind. Everyone from mom-and-pop to hedge funds have loaded up on gold on the theory that Fed policy was destroying the dollar. It didn’t happen. Then the “death of fiat money” theorists underpinned further legs of strength in gold. In the end the predictions of imminent hyper inflation were dead wrong. Will inflation come? Sure. Anytime soon? Highly unlikely. Still, six years into the crisis, central banks are pushing on a string, with a continued threat of deflation. What was underestimated? It’s a global balance sheet driven recession/depression/slowdown (take your pick). All of the efforts to reignite credit via various monetary policy mechanisms don’t work when consumers, corporates and sovereigns are all austerity focused.

So for the masses that own gold at 1500, 1700 … even 1900 bucks still have no evidence to support their positions – yet, the gold longs have been rather arrogant, showing little fear of the downside risk. Their reckless message: Every portfolio has to own gold (as an inflation hedge). Meanwhile, they may be risking a fall back to $1,100 or lower. Keep in mind, that’s losing 40% of the value of your money (potentially quickly, if you are familiar with the way gold can move) … all in an effort to protect against an inflation rate that can’t muster 2% per annum in most of the developed world.

Given the massive and widespread position in gold, watch for margin calls, forced liquidations, hedge fund failures and perhaps we get a true stress-test of the loved ETF instruments (can GLD, the world’s second biggest ETF withstand a mass exodus?).

Bryan Rich

Bryan Rich began his trading career with a $600 million family office hedge fund in London. Later, he was a senior trader for a $750 million leading global hedge fund in South Florida. There, he helped manage and trade a multi-billion dollar foreign exchange options portfolio. Today, Bryan runs Logic Fund Management, a currency and macro research, advisory, consulting and money management firm.  He is also the founder of FXTraderProfessional.com and co-founder of BillionairesPortfolio.com.