Guest Post : Ad Hoc Commentary on Gold – the New York Whale by Bernie

As we were saying, pundits were expecting too little from the EU Summit. The German creditors blinked during the EU Summit because doing otherwise will risk themselves being next in line for the bond vigilantes.

Perhaps one of the most important lessons of JP Morgan‘s recent debacle is that you don’t want to be a whale. In naval warfare, submarines are stealthy while whales can be seen from miles and miles away using sonar. If you are whale, then the pesky hedge-fund submarines know your positions, and it would be quite impossible to get out of your trades without getting squeezed by them. That is perhaps why JP Morgan loss is reported to be 9bn and counting.

The media-shy celebrity hedge fund manager, John Paulson appeared in the latest version of Bloomberg Businessweek:
“…Paulson’s decision to buy credit-default insurance against billions of dollars of subprime mortgages before the market collapsed in 2007 earned him almost $4 billion personally and transformed him from an obscure money manager into a financial legend…”

The article went on to give a short history of Paulson’s meteoric rise, which was very impressive. But it also mentioned that the legend is very exposed to gold. In today’s illiquid market, where liquidity holes are not a thing of financial folklore, this information could be used by the stealthy submarines:
“…Gold is Paulson’s biggest, boldest—and most simplistic—idea in several years: The wild volatility of many gold stocks is part of the reason for the continuing slide in several Paulson funds…”

What concerns yours truly is that the price action of gold was not great. Gold closed the week at 1597.45, below our favorite 1599 support. Fundamentally, gold is a hedge against political failure. Over the weekend, the Germans had shown the world that the Europeans have the political will to do the right thing. Even the Arab Spring seems to give birth to peaceful democratic nations. So, watch gold. That baby could very well lose its shine in the short term. We think it is a buy on dips, but perhaps after a fortnight or so.

Good luck in the markets.