While I am thrilled with how well the trade worked out already, my naivete reminds me of Lefevre's old adage to follow the path of least resistance; I had been to caught up in the short-term horizon of this trade, that I forgot to acknowledge the influence of the longer-term momentum.
It is bitter sweet to have closed out of the position. This has been my largest trade to date, on a risk-weighted basis, comprising ~12% of portfolio 20-day VaR / PML - the upper threshold of my internal trading guidelines. Now without another week of sleepless nights, I can re-focus my efforts back to my core strategies.
While I still believe there are reasonable fundamentals underlying the demand for Gold, I do believe there is a non-negligible probability of jump risk given that this rally seems to be catalyzed by a crowded USD-carry trade and the potential for a strengthening dollar (Friday's job report will be key). A short squeeze on the Short Dollar-Long Risk trade, as talked about in Mauldin, seems inevitable but not imminent. If the U.S. economy begins to mend itself ahead of schedule, the potential for rate increases will be dollar positive-gold negative; again, the unemployment rate will serve as our barometer for indications of FOMC posturing. Now that I have reduced risk, I am thinking about ways to quantitatively express my fundamental views on this jump risk, particularly in E.M., perhaps via deep OTM puts and long-vol expressions on E.M. ETFs? Brazilian puts (EWZ) or short Chinese Real Estate (TAO) anyone? I also want to re-shift my focus back onto natural gas as we get into the winter draw season. More to come...
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