What a week in the markets, the exaggerated up and down movements are not based on fundamentals but mostly based on Fear.  The investing environment we are currently dealing with is irrational when it comes to assessing value and direction, sometimes even the fundamentals do not even apply.  Why?  Because fear is becoming a bigger driver for these markets and this throws fundamentals out the window, the Fear Trade could trump all others and probably will for the moment.

But the Fear Trade only lasts so long, when fear and pessimism is at its lowest, the greatest opportunities present themselves.  As an investor, that’s when we want to play our trump card, when the time is right to use it and the odds of you winning the hand are in your favour.  But I don’t think it’s time to play your trump card just yet, the fear trade can last much longer than we all want and I don’t think its fully priced into the markets yet.  In fact, the fear trade for commodities traders could just be starting and it has nothing to do with fundamentals for supply and demand.  It has to do with the Fear of protecting your money from counter party risk and possibly your own commodities broker.

The financial system is now totally broken in the US and outright thief of investor’s money has now become a common place from the untouchable powers that be on Wall Street.   Commodities investors who participate in the futures market learned this lesson all too well from the theft of money from MF Global private investor accounts.  The company used client money to gamble on Euro debt and not only did MF Global lose their money, they lost client money of about $700 Million which is still unaccountable and there is no investigation into the company or the politicians involved.

The bigger issue is counter party risk with other brokerages that fell under the umbrella of MF Global.  Smaller brokerages would trade via MF Global and use them as their clearing member; even their money is now being frozen.  Also, any customer who withdrew money out of MF recently may have those funds seized in a “Claw Back” and pooled with other money to be used for settling claims.  It seems outright theft has now become legal for wall st and the politicians, they have thrown all the rules out the window and financial contracts in Commodities Futures are no longer a viable investment option.

I would suggest listening to this interview with Gerald Celente and you will understand what we mean by theft:
http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/11/17_Gerald_Celente.html

I think this is just the beginnings of stories like this, the whole system is based on counter party risks and MF Global was the canary in the coal mine as to the lengths the will go to steal your wealth.  This is the Fear Trade that I am most worried about, the fact that current financial system and unknown counter party risks can shut you out of your funds, have them seized and held up in a legal system that is dysfunctional and biased toward the State and Bankers.  This does not make for a safe and stable investing environment when it comes to trading futures via the CME and Commex.  It’s sad to say, but the financial system in the US cannot be trusted anymore and I would start investigating your commodities brokers because having a futures trading account could be detrimental to your financial wealth.  The western world of commodities trading is all about leverage, some will win big, some will lose big.  Getting paid off on your investment was never an issue until now, it seems everyone investing in these markets has to now consider if they will have access to their money.  This is the growing Fear Trade I am talking about, the question is whether your money is safe in the system anymore.

Our outlook for Commodities has not changed; the drivers for higher prices longer term still remain in tack.  It’s just a simple concept every economic student learned in school, when demand is greater than supply, prices naturally go up over the long term.  But now that the fear trade is in full swing, short term movements will be easily exaggerated to both the upside and downside. This makes investing more difficult and at the moment the risks are high, using technical analysis will help us reduce these risks.  Regardless of our longer-term outlook, we must rely on these short term trends in charts to determine entry and exit points.

Looking at the 1 year chart comparing the companies in the gold, oil and financial sector we can see that these markets started correcting over the last week and we are getting close to the support zone.  This week’s trading action could be very critical, if support on these charts do not hold, the sell off could continue.  If we get a bounce off these support levels, the sideways trading range will continue.

At the moment I am not sure what will happen because of the unknown Fear trade and if the counter party risks of contagion continue, something we will watch over the next few trading days.  The best suggestion I can provide is that if you are concerned, I would consider selling part of your portfolio during strength and raise some cash, we still may get cheaper prices if the Fear Trade continues.   At the moment, I am looking to raise additional cash and waiting for a setup to present itself.  If the market roll over continues, we will look for new opportunities to add to our current short position in the financials.  If we get a technical bounce, we will look for opportunities to trade on the long side.  At the moment, we can still see the sideways trading range working until it doesn’t, at which point we will look at our overall strategy and adjust accordingly.

On Thursday, we thought oil was looking a little toppy and we started taking a small position in HOD, this trades inverse to the price of oil.  Here is a link to the trade alert sent out, http://goldenfortunes.com/index.php/the-golden-blog

We will try to keep you posted on any material events in any of our holdings and trading positions that are currently open. Depending on how the precious metals trade over the next few days, we notify you if any action needs to be taken.  For now, if you are unsure, we suggest going to cash.