Abortive Gold Trade

Of late, the NIFTY has been climbing up while Gold has been dropping. When I looked at the short term technical charts of NIFTY and Benchmark Gold Bees Index (I am long this index on a long term basis), I had an idea – to short the NIFTY and go long on Gold. So I chewed upon this trade set-up idea this weekend and finally perished the thought. Interestingly, my gut-feel (aka intuition or 6th sense) is a biased coin. When I have relied on my inner voice and followed the thought or idea that has sprung to my mind first, I have generally found myself to have chosen wisely. But this is generally related to work related and other decisions. Now, investing is certainly not about which-turn-to-take-from-Masab Tank type of inner voice invocation. So, it is not surprising that for me, when it comes to investing gut-feel, usually my initial gut-feel reaction has always tended to be dead wrong!!! Quite a personal contrarian indicator.

The chart alongside shows the 7.45% return of the NIFTY over the trailing 12 months against the very significant 16.25% returned by the Benchmark BeES index. The first half of the trailing calendar year has generally seen gold prices moving in lock-step with equity prices. From February this year onwards, the correlation has turned mildly negative which is what seems intuitive. So, commodity prices being the primary fuel of the stock indices has ceased to be the case for now as metals and of course, oil contracts. As I read up more on the internet, I figured out logic and reasons for why my initial gut-feel spawned trade idea was bad. On Gold, with Greece passing austerity measures, there is less of a motivation to look at gold as a safe haven in the very short term. So, it is likely that the coming week will be bearish or directionless for the yellow metal. Moreover, the US markets are going to be closed on Monday (4th July) and therefore gold could continue going the “buy the rumour, sell the fact” way down. On Thursday, the ECB and the BoE will have interest rate decisions announced and Friday will see the release of non-farm payroll data in the US. Therefore, it is unlikely that traders will take a strong view before these data points are clear.

So, if you look at the above chart, my hunch is that during the coming week, the gap between the yellow line (proxy for Gold) and the NIFTY will narrow down. Even if it doesn’t, no big deal for I have done the best thing that practise has taught me re investing: ignore my otherwise extremely reliable inner voice when it comes to pulling the trigger on investment decision making. Even if my intuition is proved right, at maximum I would just be guilty of an opportunity loss. Trade idea postponed, if not entirely killed, to next week now!

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About Kaushal
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