how you know Gold is NOT a bubble

its a long term investment.

everyone here knows that paper money will be worthless eventually just like Zimbabwe but they still bash gold.

gold may drop another 20 to 30 % who cares.

buy gold because it will go higher maybe 10 yrs from now.

its just like money in ur bank. over the time money will be able to buy less stuff but not gold. gold is the universal currency which can be sold in any market around the world.
 
Must be alot of other idiots like me that bought gold on the pull back around $1115-$1120 who never had bought it much before. Are we permanent bagholders? or we going to get a pop in next few weeks to get us out?
 
If you don't like the position right now, just hit the sell button and buy on a break through to new highs. You take a couple % loss now eliminating the risk of a bigger loss, while keeping the door open for big gains on the upside, should the rally continue at some point.
 
Quote from silk:

Must be alot of other idiots like me that bought gold on the pull back around $1115-$1120 who never had bought it much before. Are we permanent bagholders? or we going to get a pop in next few weeks to get us out?
More...

Why did you buy at 1120, what was you trade rationale?

IMO there were two possible reasons to buy - you expected a short tem bounce, or you expect a continuing bull market. In the latter case, it would be an error to exit on the next pop, you will miss a $500-1000 move if the bull market thesis is correct. If it was a short term play then you just took $40-45 in heat and had a $50+ stop, which seems too much for an expected quick pop.

Basically it looks like you entered with no plan or conviction at all...in which case the correct action is the same as every other time a trader has a position but no plan or conviction - exit immediately at the market.

Personally I see gold as acting consistent with a typical bull market, so I have got long on this pullback and will hold until it either gets too extended to the upside and a serious correction looks imminent (as happened recently) or shifts into a long-term downtrend pattern of lower highs and lower lows. Right now we are still above the prior all-time high of 1027, still above the 200 day MA, still above 1000 etc. A further fall is still possible ofc, so stops are necessary, but there is no sign I see to indicate the bull market has ended.
 
Quote from makloda:

How does that give you an edge trading it?

Once you factor out OTM asymmetrical option strategies there is little edge you gain trading the supposed bubble directionally. And even with options: nobody can guarantee you won't go broke paying for premium until the bubble finally bursts.
More...

It's an edge because you know that the probability distribution of future prices has a major skew to very large price falls in the next few years. If the options market is not pricing that in, and I have never seen a bubble where that was the case, then it's free money over the long run. If the options market is pricing it in, you can replicate puts by momentum/breakout strategies on the short side, and trade them bigger than normal because the potential upside is higher than usual.

Any trader can guarantee not going broke by using the trivial technique of not risking too much in premium each year. If you risk say 3% per annum on a book of OTM back month puts then it would require the bubble to last 7 years without bursting for you to lose 20%. No bubble I have seen or examined in history has lasted more than 3-4 years after reaching bubble values and widespread speculative participation. So your max likely risk is about 10% and can be tailored at will if you're more risk averse.

For some fine tuning, one can use mechanical timing input e.g. wait for when the 200 day MA is breached, or when the slope of it goes negative. This misses the early profits whilst avoiding premature entry. Ofc there's the potential to time on a discretionary basis too, which further reduces the timing risks.

Knowing something is a bubble provides massive, fat edge. Like any market opportunity you can't just punt with no forethought or strategy and expect to profit, but that's the same for every strategy you or any trader uses also.
 
Quote from Ghost of Cutten:

It's an edge because you know that the probability distribution of future prices has a major skew to very large price falls in the next few years. If the options market is not pricing that in, and I have never seen a bubble where that was the case
More...
Premium prices skyrocket on big upward price swings. You may keep your bet size small to minimize potential losses, but in turn you limit your potential profits should your hopes for a 10 sigma event eventually come to fruition.

I'd love to see a theoretical backtest for your "risk 3% premium annually on OTM back month put premium" using a vanilla Black-Scholes approach in Excel on the Nasdaq 100 index during the period of 1995-2003. Let's assume it was painfully obvious tech stocks were a bubble in the summer of 1995. How would this approach have fared until 2003, well after the bubble burst?

Then, one could see how the "enter the put buying strategy only on breach of 200 SMA" would change results. I would assume the risk reward characteristics change massively to the positive side, since fat tail events are historically statistically more likely in down- rather than in uptrending markets.

Assuming the above two tests play out as I expect, this brings up the question: Does "knowing" something is a bubble help you (IMO, it is rather irrelevant)? Or is it enough to disregard if something is a bubble or not and one simply keeps speculating in the direction of the prevailing long-term trend?
 
Quote from Ghost of Cutten:

Why did you buy at 1120, what was you trade rationale?

IMO there were two possible reasons to buy - you expected a short tem bounce, or you expect a continuing bull market. In the latter case, it would be an error to exit on the next pop, you will miss a $500-1000 move if the bull market thesis is correct. If it was a short term play then you just took $40-45 in heat and had a $50+ stop, which seems too much for an expected quick pop.

Basically it looks like you entered with no plan or conviction at all...in which case the correct action is the same as every other time a trader has a position but no plan or conviction - exit immediately at the market.

Personally I see gold as acting consistent with a typical bull market, so I have got long on this pullback and will hold until it either gets too extended to the upside and a serious correction looks imminent (as happened recently) or shifts into a long-term downtrend pattern of lower highs and lower lows. Right now we are still above the prior all-time high of 1027, still above the 200 day MA, still above 1000 etc. A further fall is still possible ofc, so stops are necessary, but there is no sign I see to indicate the bull market has ended.
More...


Listen to this man.

The prophet.
 
China's economy is not recovering too well. They need the production orders from the US to recover.

Given this interdependant relationship between China and the US, what is China going to do? Allocate more of the foreign reserve in USD and less on gold. China need to appreciate USD making their production costs cheaper to stimulate/save demand.

So, combining this fact with the recovering US economy, gold is coming down. In a technical sense, it is doing a lower low every week. I would be lying if I said it is going up.

I am sure Jim Rogers and Marc Faber already got out of gold when Dubai collapsed. They are not millionaire for letting their profits turn into losses. I am 99% sure that they are shorting it on its way down and are gonna short more.

PA
 
Quote from makloda:

Premium prices skyrocket on big upward price swings. You may keep your bet size small to minimize potential losses, but in turn you limit your potential profits should your hopes for a 10 sigma event eventually come to fruition.

I'd love to see a theoretical backtest for your "risk 3% premium annually on OTM back month put premium" using a vanilla Black-Scholes approach in Excel on the Nasdaq 100 index during the period of 1995-2003. Let's assume it was painfully obvious tech stocks were a bubble in the summer of 1995. How would this approach have fared until 2003, well after the bubble burst?

Then, one could see how the "enter the put buying strategy only on breach of 200 SMA" would change results. I would assume the risk reward characteristics change massively to the positive side, since fat tail events are historically statistically more likely in down- rather than in uptrending markets.

Assuming the above two tests play out as I expect, this brings up the question: Does "knowing" something is a bubble help you (IMO, it is rather irrelevant)? Or is it enough to disregard if something is a bubble or not and one simply keeps speculating in the direction of the prevailing long-term trend?
More...

Usually in stock indices, premium drops on rallies. In 2007 implied vol was at about 10-15 near the highs. For 2000 it was higher but not abnormally. I haven't looked at it for thing like Asia in 1995-97 or Japan 1988-1990, it would be worth investigating.

Regarding the MA filter, I haven't done a comparison but I would expect returns to downside momentum strategies like this to do much better than normal once bubble valuations/sentiment appear. Even if a MA approach 'works' normally, it should do better in bubble situations. Again, definitely worth a more comprehensive test.

I wouldn't say the NASDAQ in 1995 was a bubble, and the s&p definitely wasn't. I could see 1997 maybe, and 98-2000 definitely. A bubble doesn't mean 50 pe when growth is 50% per annum, or the S&P at 18 times forward pe estimates, that's just somewhat pricey. Bubble means values that can't remotely be justified even on optimistic forecasts.

Another filter I use is negative newsflow which results in bad price reaction, in the leading bubble sectors e.g major earnings misses, or downturns in leading indicators. It's not foolproof and is somewhat subjective but raises the odds IMO. In crashes I've seen, it always took sustained negative newsflow to really hammer prices down. In 2000 you had things like the MSFT antitrust trial loss, lockups expiring, fed hiking rates, and the big telcos in Europe making ludicrous 3g pice bids, with very negative market reaction. In 1995-99 by comparison, TMT company newsflow was good even during the 1998 mini-crisis. More recently, housing-related stocks started having bad news in late 06 and early 07, this spread to financials by late 07.

I am pretty sure that combining bubble values/sentiment, momentum indicators, and news flow can reduce the risk of being too early. Apply limited risk with either stops or puts and it should be promising. It's hard to backtest because some elements are discretionary, and the ones based purely on technicals aren't as good risk/reward IMO. But even something as simple as doubling size on downside momentum methods could potentially boost profits noticeably. Maybe it's not possible to build a quant system out of that, but it definitely is possible using discretionary judgement.

Another possibility is wait for significant extension above long term MAs befor buying puts. And potentially booking some profits on volatility/fear spikes.
 
You must log in or register to reply here.
Back
Top