So based on my backtesting, it would appear that the impact of this downward AM/PM bias is on average about 80 cents per ounce per day over the period 2000-today. In the more recent period (2008-today) its a bias of about $2.42 per ounce per day. Spreads on the GC (gold futures) contract are 0.1, so you lose that once per traded contract - or 40 cents per ounce. Commissions total another 0.15, so friction costs you about 55 cents of your $2.42 per ounce.To trade this, you simply need to open a futures account; drop in say 50k, and make your daily trades. Margin for a single GC contract is around $10k. The timing of the trade is a bit annoying, since you’ll have to wake up at 330am eastern to execute your short, and then stay in there until london PM fix at 800am eastern to close it out and go long. At all times, you’re either short 1 or long 1 GC. Mechanics would look like this:
day 1: sell (short) -1 GC @ 330 am ET; buy (long) 2 GC @ 800 am ET
day 2-N: sell (short) -2 GC @ 330 am ET; buy (long) 2 GC @ 800 am ET
Risks:
As is the case with all of these market anomalies, as soon as enough people figure them out, they vanish - or they move. So perhaps the timing of the moves down changes to perhaps 230am instead of exactly at 330 am, since some traders will start to front-run the shorts that kick off at 330, and that will end up decreasing your effective bias.
Also, futures provide you with lots of exposure. A big drop in gold at the wrong time means you lose gobs of money. 1 GC contract = 100 ounces of gold; at current prices, your value at risk is $176k either long, or short, each day. Drops of $100 in gold while you’re long means losses of $10k - in one day. Conversely, if gold breaks out when you’re short, its also ugly.
In backtesting, the worst day: -6600; best day: +11000. Worst week: -9200, best week +23000. If you aren’t comfortable with positions and movements of that size, probably best to just watch from the sidelines. And if this stops working, the losses are likely to be pretty impressive. With all these things, backtesting can give you a sense of the historical risk, but does NOT take into account black swans which by virtue of their nature, aren’t events we’ve seen before. Gold drops of $300, or a breakout of $300 are possible if something really dramatic happens.
Last risk: MF Global futures traders didn’t get all their money back. Who wants this outcome?
I don’t know what the spreads on BullionVault are. I’m sure you could make the same trades there, but the spreads would determine if the "friction" involved was worthwhile - additionally, the "friction" in your life of waking up at 330 am eastern each and every trading day is also something to consider.
I used to trade gold & silver futures contracts. Futures were a good vehicle because trading costs are low (spreads are narrow and commissions are low) and the market is quite liquid. I don’t anymore; although I made money, it was too much stress, I don’t like the MF Global type risk, and I made a decision to focus on other things in my life that are ultimately more (spiritually) rewarding. I only did the backtesting of this trade because I read about it, and wanted to know if it was real or hype.
[quote=cmartenson]Some who are reading this are likely having an eye-rolling moment because they hold a belief that there is no conspiracy to manage the price of gold.
[/quote]
LOL, I had a hard time reading this post because I couldn’t stop my eyes from rolling…
Speaking of beliefs, I have a hard time reconciling two very popular goldbug beliefs:
The Fed suppresses the price of gold to protect the viability of its currency.
The Fed prints money to devalue its currency for the "inflation solution" to the debt crisis.
To devalue the dollar, all the Fed has to do his create the impression in the market that the dollar is losing value. What better way is there to do this than to manipulate an INCREASE in the $ price of gold? If the price of gold is the most accepted measure of the dollar’s value, why would the Fed want to surppress it?
If you want something to believe in, believe that Wall Street exists for only one reason…to take your money. And you don’t have to be in the stock market to lose your money to Wall Street. How much of your money went to Wall Street speculators the last time you filled up your car?
Instead of playing their game, again, why don’t we focus on developing a strategy to insulate ourselves from Wall Street? Our survival will depend on how idependent we are from the Wall Street controlled markets.
I realize articles like this are great marketing for the site, but what value does this speculation have in the long run?
Best…Jeff
Slightly disrespectful in tone don’t you think?
Hi Jeff…this is a constant theme of yours, as if most here disagree. Tho it may have been on occasion, I don’t recall it being disputed here.
If you have ways to protect yourself from Wall Street better than what the good doctor suggests, please share them. That may help the folks that don’t have access to Chris’s suggestions in second part of these reports.
Denny - the first and most important step is to become market neutral. Then learn how to trade in whatever direction the market moves. I am greatly simplifying, but it really is as easy as buying and selling calls during an upward move and buying and selling puts during downward moves. By at least 5 months of time in the options and almost always buy in the money or no more than one strike out of the money options. Develop a trading rule set that you will follow explicitly, get rid of being biased towards market moves one way or the other and take what the market gives you.
Thanks Dogs…but I kinda doubt Jeff will agree w you.
Do you use stop losses or go along for all the rides? What % of your portfolio is in a trade at a time?
Jeff…take a deep breath and listen to yourself, man…how do you expect to be taken seriously when you bash gold and one of Dr M’s stratagies to insulate ourselves from Wall Street and then you point out how Wall Street is profiting from high gas prices for those whose store of wealth is dollars. It’s really quite different for those whose store of wealth is gold.
Sorry the chart is a bit dated, but I think you get the picture.
[quote=Mark_BC][quote=Dogs_In_A_Pile]
Denny - the first and most important step is to become market neutral. Then learn how to trade in whatever direction the market moves. I am greatly simplifying, but it really is as easy as buying and selling calls during an upward move and buying and selling puts during downward moves. By at least 5 months of time in the options and almost always buy in the money or no more than one strike out of the money options. Develop a trading rule set that you will follow explicitly, get rid of being biased towards market moves one way or the other and take what the market gives you.[/quote]
Do you use stop losses or go along for all the rides? What % of your portfolio is in a trade at a time?
[/quote]
Mark -
I never use stop losses. Depending on which chart I used to enter (Daily, 233 minute, sometimes 55 minute) I will let the trade run until a few candles have closed. Since I am rarely in at the exact beginning of the move - the chart is already moving in the direction I expect it to. I never get the first best nickel or dime on the option price, but I am also not looking for it either. If the trade starts to back up over me, I will assess what is going in in terms of market forces or stock/sector specific news. If nothing is going on that is obvious, and the indicators don’t give me a reason to leave the trade, I ‘ll typically let a couple more candles close. If it doesn’ t turn back my direction, I simply close it with a small loss and move on. Generally speaking, the larger the charting interval, the more well established the trend is so some wobbling on a 55 minute candle isn’t cause for too much concern if the entry was on a longer chart interval.
I’m only interested in the chunk of the move in the middle. I am always long gone from the trade before the last, best nickel of the move occurs. I have an idea of how much the move is going to be before I get in so that helps target my exit point. Exit criteria is a combination of several things - coming into a top or bottom Bollinger Band, coming up against a 20, 50 or 200 period MA or better yet, a 200 period MA laminated against a Bollinger Band. I also use MACD, ADX and StochRSI to help identify trade entry decision points. There are also market events that I will close a trade on. I will very rarely (read never) take a trade through that company’s earnings report. I’ll never go through a stock split unless I have a large profit on the trade and then I’ll usually close enough of the trade to cover the initial trade and most of the profit. Then I might go through the split with the market’s money.
Rather than give you a % of portfolio number, I will tell you that I ALWAYS trade with the same dollar amount. I NEVER have more than half of my trading account cash tied up in trades and I never put more than half of that in any one trade. A typical month is 5-10 trades. As profits accumulate, I move money to separate accounts for different trading techniques, that are done once a month.
Because I am 100% market neutral, it is very easy to remain emotionally detached from day to day market gyrations. Cat is by far and away the better trader in the family. For years, Goldman-Sachs was her whipping boy. The only time she got burned on GS, was when short sells were suspended for a couple of days while she was in puts. She lost all her profit but was able to close the position with a very small loss of principal.
It took a long time and a lot of practice trades on paper to get to where we are, but it sure is nice. Market neutrality insulates you from the noise and distraction that shows up on big green or big red days. The pundits on CNBC, Bloomberg are just white noise generators reading copy. I may turn CNBC on just to verify that they are talking about the same old same old each day and then turn the volume off. Every now and then though, they get a guest on or one of the jaw flappers says something that is a real nugget, but for the most part, 98% of what they yammer about is just noise. High freq trade algorithms?? Meh… What the FED says or does? Meh…99% of the time I won’t be in a trade before FOMC minutes or Bernanke-speak anyway.
I have a basket of stocks that I screen every night for upcoming trade entry possibilities. All I need is a stock to move in price - up or down - and I’ll trade the movement accordingly.
It gets fun when you see a stock about to turn over and drop in price. Do you know how much fun it is to sell naked calls at the money, buy puts and watch the stock price drop? As it approaches the end of the drop, buy back the calls to close the naked position, and sell the puts. Twice the profit on the same price move.
Like I said in my earlier post to Denny, I greatly simplified and streamlined the very deliberate process Cat and I go through with our trades. But at the risk of repeating myself, the first and most important step is to divorce you brain from market movement bias and become truly neutral. 150 points up…yawn. 235 points down…ho hum, whatever. Trading in the direction the market is going, and taking what the market gives you is a lot easier and less stressful than entering a position and hoping that it goes up.
Heard rumours that Easter could be yet another quiet holiday period for an orchestrated take down of Gold and Silver?
Also here’s a article on Silver manipulation…
Http://financialsurvivalnetwork.com/2012/03/silver-manipulation-acknowledged-by-government-christian-garcia-goldsilver-com/
Hope you all have an enjoyable weekend 
Cheers
Scubaroo
Denny,
You are comparing apples to oranges. I can’t buy gasoline or anything else with gold. Right here, right now, gold is not money, and entertaining the belief that someday the big bankers will reward you for owning gold (by adopting a gold standard) is not a very convincing investment thesis.
To buy gasoline, or anything else, with gold means that I have to liquidate it with a broker, who takes his cut, and then pay taxes on any capital gains I might have on my sale. And the price I get for my gold is determined by Wall Street. How is that insulating myself from Wall Street?
I could make the argument that my Apple stock will buy much more gasoline than gold, but what does it prove? Nothing.
As I have said many times before, the only investments that make practical sense are those that reduce your cost of living. This reverses the game, as every dollar that you save (ROI) in the future becomes more and more valuable and cannot be taxed.
Now Denny, maybe you have a zero-energy home, can grow most of your food, obtain your own water supply, and generate your own electric power and liquid fuels, but my guess is the majority of us aren’t sitting so pretty (including myself) in that regard. We have a community of very smart people here, why don’t we concentrate our energy on the problems that matter, instead of wasting it debating the latest Wall Street bubble and politics.
You can’t beat Wall Street playing their game, and if you own gold, you are playing their game whether you recognize it or not.
Best…Jeff
[quote=JAG][quote=Denny Johnson]
…how do you expect to be taken seriously when you bash gold and one of Dr M’s stratagies to insulate ourselves from Wall Street and then you point out how Wall Street is profiting from high gas prices for those whose store of wealth is dollars. It’s really quite different for those whose store of wealth is gold.
[/quote]
Denny,
You are comparing apples to oranges. I can’t buy gasoline or anything else with gold. Right here, right now, gold is not money, and entertaining the belief that someday the big bankers will reward you for owning gold (by adopting a gold standard) is not a very convincing investment thesis.
To buy gasoline, or anything else, with gold means that I have to liquidate it with a broker, who takes his cut, and then pay taxes on any capital gains I might have on my sale. And the price I get for my gold is determined by Wall Street. How is that insulating myself from Wall Street?
I could make the argument that my Apple stock will buy much more gasoline than gold, but what does it prove? Nothing.
As I have said many times before, the only investments that make practical sense are those that reduce your cost of living. This reverses the game, as every dollar that you save (ROI) in the future becomes more and more valuable and cannot be taxed.
Now Denny, maybe you have a zero-energy home, can grow most of your food, obtain your own water supply, and generate your own electric power and liquid fuels, but my guess is the majority of us aren’t sitting so pretty (including myself) in that regard. We have a community of very smart people here, why don’t we concentrate our energy on the problems that matter, instead of wasting it debating the latest Wall Street bubble and politics.
You can’t beat Wall Street playing their game, and if you own gold, you are playing their game whether you recognize it or not.
Best…Jeff
[/quote]
Jeff,
You’re a highly intelligent person and I alway value the insights and knowledge you present here, at least in part because you’re an unconventional, outside-the-box thinker. I agree with you that investments that reduce your cost of living make sense but to say they are the ONLY investments that make sense is unrealistic. And regardless of what you do, in one way or another, you’re going to play Wall Street’s game.
You’re using a computer and the Internet. You’re playing Wall Street’s game (YPWSG).
You have a phone. YPSWG
You have a home. It is most likely insured. YPWSG
You own a home. You’re paying property tax. YPWSG
You have a health care practice. You pay for a license, malpractice insurance, premises liability insurance, and other expenses. YPWSG
You most likely have health insurance. YPWSG
You most likely have a car (or motorcycle or other motorized conveyance). You had to buy it, you have to maintain it, and you have to service it. YPWSG
I assume you’re not making ALL your own clothing and shoes. YPWSG
Self reliance with regards to food, energy, water, etc. all require purchases and maintenance expenses. YPWSG
You have to use some elements of the banking system. YPWSG
You’re probably going to pay for some type of education for your children. YPWSG
Etc., etc.
And are you saying you own no gold or silver whatsoever? You either don’t have much wealth to preserve or YPWSG even more so than the holders of the shiny stuff. You can’t leave your stuff just sitting there for years. The holders of the shiny yellow stuff can bury it and sit on it for years and years and maybe just pass it on to the next generation. It’s unlikely that a many thousands year old strategy of relying, at least in part, on precious metals is suddenly going to disappear in a puff of smoke.
You’re advocating withdrawing from the system and I agree with that in part. But there’s a problem with that philosophy taken to the nth degree. If we’re all withdrawn and ducking under the radar, you don’t think TPTB are just going to let that continue, do you? You can only "hide" for so long before someone or something comes after you with some new wealth extraction scheme or something worse. Defensive strategies ultimately fail when, sooner or later, you’re backed up against a wall and there’s no place to hide.
To survive and thrive, one is going to have to be flexible, nimble, and adaptable and keep one foot in both worlds, ready to shift at a moment’s notice. Personally, understanding and negotiating the Wall Street and political morass is just as important as becoming more food, water, energy, skill, etc. independent. Putting all your eggs in one basket is never wise. Having the options of multiple courses of action is.
BTW, excellent article Chris! This article is a perfect example of why your services are so valuable.
I’m still amazed by those who complete dismiss any element of manipulation in the PM markets.
[quote=JAG]You are comparing apples to oranges. I can’t buy gasoline or anything else with gold. Right here, right now, gold is not money, and entertaining the belief that someday the big bankers will reward you for owning gold (by adopting a gold standard) is not a very convincing investment thesis.
[/quote]
I think you’re right (the part in italics), but for a different reason. It’s very possible there can be a gold standard and at the same time the average gold owner will have a difficult time being able to reap rewards. A harsh windfall tax, PM export restrictions, and mandatory reporting at bullion/coin dealers are all easily plausible. The average gold owner will have a hard time reaping the rewards, unless one can arrange an under-the-table private party sale or do a deal in the black market (and that’s certainly not impossible). This is why it’s a prudent move to have some of one’s gold/silver outside the country, and if I remember correctly CM recommends this too.
You don’t have to sell at a dealer or broker. I have been inquiring among select family and friends in the US if they are interested in purchasing a couple coins at straight spot price (we are finally approaching a point to put some of our liquid wealth towards productive assets), and I have three interested individuals, two of them very interested who want to buy NOW. And this is just in the US… in Asia there are even more potential buyers. So I’m not worried about dealers taking their cut. And yes, for now the price is currently determined by the financial markets (not JUST Wall Street), but a number of outcomes (most likely resulting from government actions) may create two prices for gold or silver, the "official" price and the "street" price, and where Wall Street’s influence over the prices will be lessened. How many countries have or have had "official" prices for something (gas, consumer products, currency exchanges, etc) that bear little resemblance to what the average person on the street pays because of import/export restrictions, capital controls, or other disrupting economic factor at work?
The world and the markets are bigger than just Wall Street and the big banks. They are a major player, yes, and one ignores them at one’s own risk, but they are not the only player in the game. This is pretty much why I have trouble accepting some of your statements… to make the machinations of the banks and big boys on Wall Street as one’s primary consideration to the exclusion of all else (geopolitics, foreign markets, resource scarcity) comes off as an over-simplification in this case. As an engineer I can certainly appreciate how simplifying assumptions and approximations make understanding a problem easier, and I can see where your "trader mindset" has it’s uses in some situations. But like ao hinted at, I know it’s also important that no one tool or assumption or mindset works for everything. Keep the trader mindset, just maybe explore incorporating it with other perspectives as well.
- Nick
Another explanation for the decade long trend of strong buying at night versus selling during the day would be that other countries, such as China (or citizens of other countries), are more interested in gold than people in the US on average. For example, if China were slowly accumulating gold in the hopes of one day backing their currency with gold, we might see the trend as described in this article. Opinions regarding this thought are welcome.
I may not be able to buy gas with gold but three years ago the contractor who built our double car with work shop($26K) would have accepted payment in Gold Eagles. It’s also possible that if I searched for the right gas station I might be able to run a tab to be paid with Gold or Silver Eagles.I have a feeling that if we have hyprinflation you’ll be able to arrange payment for most anything with PM’s. Maybe we should call it bartering rather than buying.
Hey… some people are just anti-Gold. Everyone has to make their own choices, but I don’t find any of the arguments above convincing in the least. Gold is money… the very best for saving longer term. I can’t go to my local gas station and buy gas with Euros… does that mean that Euro’s aren’t money? Absurd.
Gold is actually the ultimate money, because it has no counterparty risk… it represents payment in full. If you don’t like it, don’t convert any of your paper money into it. Just don’t expect to have any "money" when the paper finally meets it’s demise.
Physical Gold is not Wall Street’s game… Paper Gold is their game… and I would of course stay away from it in the form of GLD, SLV, and/or Comex futures trading. To the degree that the banks that do bullion banking hold physical, you can bet that this asset has been subject to mucho hypothecation…i.e. in an endgame scenario there will be more "owners" than there are ounces.
Plenty of smart folks dislike Gold… Denninger…Nicole Foss and Illargi… and Jag. If you have savings, and want to still have savings post the coming global fiat currency debacle… then you might want to hold some too.