We've tried to emphasize that short term pain is a necessary part of this trade. Given the scale of the European mess, there will be further flight to safety over the next few weeks, months and possibly years. Indeed, the Dollar Index continues to climb as investors buy up Treasuries with zero regard for the failure of the US government to bring its debt under control or even to have a plan to do so.
Yet precious metals remain correlated with risk assets.
To remind readers, this is down to 2 reasons:
- As markets deteriorate, agents have to sell assets to cover margins. Gold is a common reserve asset for many big players and therefore takes a hit.
- With Gold's safe haven status in the balance, investors prefer bonds. US, UK & Japanese most commonly. As the main method of trading Gold is in USD, an appreciating dollar causes, all things equal, a fall in the USD price of Gold.
In short, we are no longer convinced that in a meltdown scenario Gold will rally.
Even if investors eventually fall back on Gold, the risks involved with taking a position this early in the day are sizeable.
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So here it is:
- We sold half of our Gold position, banking a loss of about 1.5%. This was an extremely painful decision, and ultimately reflects our poor entry timing.
- Our EURUSD position remians, in order to account for the inherent Dollar risk in Gold mentioned earlier in this post.
- We added a hedge in EURJPY, i.e. we are short at 104.05. Firstly, this reflects the house view that the ECB will ultimately print. It also exposes us to flight of capital out of Europe without running the risk of the Fed printing (which would send EURUSD soaring). Finally, we still like the play on Yen strength, covered many times on this blog.
Trading is incredibly difficult in this environment. Correlations change daily and politicians continue to dominate the newsflow. Hence our overall risk remains very light.
Expect a weaker P&L Report this weekend.
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