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Time to Short Gold?
Pinnacle Digest writes: In his latest article, Stewart Thomson discusses the current issues impacting the price of gold and exactly how he is playing the precious metal market.
"The U.S. Congressional Budget Office and the IMF have said that if the fiscal tightening that is due to take place goes ahead without action from Congress, the U.S. economy will probably fall into recession." - CNBC News, Oct 23, 2012.
Thomson highlights the fact that money managers are now focusing more on the US fiscal cliff than the euro crisis. Who can blame them?
If the US hits the fiscal cliff without making any changes, a recession is almost certain. And this fear has really started to make gold price action extremely unpredictable.
Because of the heightened uncertainty, Thomson felt it necessary to explain how he is playing the gold market. Although he remains a long-term bull for the metal, Thomson has no issues with hedging his bets for the short-term. And he explains how a recent head and shoulders pattern has developed in the gold market which could see prices hit $1630 an ounce.
Thomson explains that it is very difficult to time perfect entries and exits for gold as the price is influenced by so many different geo-political and economic issues. Because of its unpredictability, Thomson recommends “Holding a modest portfolio of short positions allows you to manage what I call, "the personal surprise zone".
Thomson goes on to state that “I like to approach major markets with an emphasis on what the underlying asset is. Gold is an asset of the highest quality, so I restrict all shorting I do, to 30% of my long position.”
Thomson goes on to explain that if gold does decline toward the $1630 level, then he would book some profits from his short position. This would increase his exposure to the long-side at that level. Clearly $1630 an ounce is a price Thomson believes to be undervalued.
Aside from missing out on potential profits, Thomson recommends taking short positions in gold to help prevent investor frustration with the metal. As we all know by now, an inevitable rally in gold prices can be delayed longer than most people have the patience for. With short-side exposure, one may not get as frustrated so easily. Thomson also believes that “In contrast, if you hold some short positions, but are overwhelmingly long the asset in play, you may find that you are able to deal with falling prices with much less stress.”
Click here to read Stewart Thomson’s entire report.