Sunday, December 6, 2009

Is the Dollar Carry Trade Dead?

I wrote the following about the ETF for Gold on Tuesday -

“I started to sell some of my Gold stocks. They have had some impressive runs and I have moved out of some extended names and into some new names breaking out of bases.”

“It has been a heck of a run, but I am looking for a near term pullback in Gold. I will be selling some here. I think the easy money has been made and will look to reload on a breakout of the next base or pullbacks into the 50-day or the +15% Band (Blue Line).”

Gold was hammered on Friday. GLD was down -4.17%! That is what happens when prices gets extended. It is normal. GLD is now at its first level of support. I mentioned two potential entry points if price pulled back. If the big boys don’t show up to defend the price of GLD at these two levels (Blue and Pink Arrows), then I will get concerned. But as of right now, in my opinion, Gold is in a once-in-a-generation Bull Market with strong fundamentals.

I think GLD is in its first real correction of this move. That would put it into a correction similar to the one in late 2007 (Black Circle). It could be that this advance is more mature that I think and GLD will have a shorter correction (Black Arrow). I do not think the move is over, but if it is, then GLD will fail to rally and a correction like the one in March 2008 should be expected (Green Circle).

The bottom line is that people have just started to believe that Gold is now an asset class that they need to own. GLD currently represents 0.4% of the Market Cap of the S&P 500, so it has a long way to go before it is a significant portion of most investors’ portfolios.

Here is how several Gold Stocks did this week. Yikes…

Is the Dollar Carry Trade Dead?
The Dollar had a strong day on Friday and is again touching the 50-day (Black Line). You can see that every time the Dollar has touched this line since April, it has failed and made lower lows. There has been an obvious correlation between the falling Dollar and rising Risky Asset prices.

The speculation this week has been that the Yen Carry Trade is back on and that it will now become the engine for driving Asset Prices higher. The Yen is also now at an obvious level of support. I was short the Yen for most of this week, but sold my positions in YCS on Friday.

The Euro is sitting at the bottom of a 1-month trading range. The Euro has been the anti-Dollar.

The S&P 500 is still in a trading range (now 16 trading days). It is either going to break out and we have a nice Christmas present, or it breaks and gives us a shot to buy it at lower prices in January.

This should be an interesting week. I am also noting a number of potential setups in Asian Country-specific ETFs.