Thursday, December 3, 2009

Buying a lottery ticket to bet against gold

I've mentioned the pseudonymous GuruFocus commenter Buffetteer17 before, noting that he is probably the savviest and most numerate of the commenters on that site. There's a lot more chaff than wheat on GuruFocus, but I usually read Buffetteer's posts with interest. He wrote this in a GuruFocus comment thread today:

According to the Sornette bubble detector formula, the gold price bubble is nearing a critical point, meaning there's likely to be a large correction in the next few weeks. I applied the formula to GLD price history going back to March and got several high quality fits, with an R-squared in the range of 92-94%. You can clearly see the faster-than-exponential price rise on a log price plot. The critical dates range from 11/27 to 12/4. I bought a few Dec 09 and Jan 10 put options on GLD as a lottery ticket.

At this point, a commenter mentioned the devaluation of the dollar as the cause of the spike in gold prices. Buffetteer's response:

Gold prices in dollars are going up super-exponentially, way too much to be explained by dollar devaluation. Maybe dollar weakness is an underlying cause, but the gold price is now disconnected from that. We're seeing herding behavior. The motivation seems to be buy gold because other people are buying it and the price is increasing.

As I noted in my own comment on that thread,

I had a related exchange with Aaron Edelheit, after he wrote a post saying people should get out of cash because of dollar weakness. My guess is that when we get the inevitable stock market correction, the dollar will rise as it did last time, and gold will drop. The longer term trends might be different, but that seems like the most likely near term scenario.

I piggybacked on Buffetteer17's idea here and picked up a handful of Jan 10 puts on GLD today.


DaveinHackensack said...

Those GLD puts (108 strike price) are up 80% today. The inherent leverage of a put option in action.

DaveinHackensack said...

Those puts closed up 132%. Here is Buffetteer17 on today's action:

Dollar index up 1.8%, gold futures down 4% today. There's more to the gold price than just dollar adjustment, but it has to be said that the dollar variance does explain about half of it. As commodity [another pseudonymous GuruFocus poster] noted in another thread (by reference), the Sornette bubble formula does not take into account exogenous events. We had a whopper of an exogenous event in the jobs report this morning.

DaveinHackensack said...

Those puts (GCZMD.X) are trading at $2.32 as I type this. I got them for $0.74 on Thursday.