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October 11, 2008

Fall Recipe

Friday was a juicy day for me not only because I had a portly long position during the last hour of trading, but also because I was short gold. As anticipated, all the hot air was taken out of gold's price as the stock market turned and, in fact, gold's plunge was one of the factors that gave me the wherewithal to maintain my long stance throughout the day because it seemed to be a clue that something had changed. So far, so good. Let's take a peek at what the action is telling us now:

gold chart

I'm still confident we'll take out $740 and head to the $600s on gold. However, silver is telling a different story:

silver chart

Now I'm going to show you one more chart, and you'll probably figure out where I'm going with this:

indicator chart

The liquidation seen over the last month has spiked the gold/silver ratio to levels not seen since the early 90s. In fact, such a rapid spike upward in this ratio is quite rare. It usually works the other way 'round. Put a bearish gold chart and a bullish silver chart in a pot with a distorted gold/silver ratio, let simmer with root of hedge, and you've got yourself a recipe for a paired trade!

Be back later with comments on the stock market's wild ride...


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