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A Trading Opportunity for Gold and Crude?

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Pairs trades often offer compelling risk-reward.

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Last year in the 'Ville, we noted the chasm between the price action in gold and crude and offered that a pairs trade -- buying one and selling the other on a dollar neutral basis -- could prove to be a snazzy situation... and it did.

I "get" why gold is glittering; when the US dollar is considered best in breed despite our own burgeoning budget deficits, the notion of an alternative currency gains steam. That along with stockpiling in China and other dynamics make a great case for the yellow metal, which have been loud given the golden power.

As I was readying for the Friday night lights, the preceding segment highlighted the arrival of gold vending machines in Abu Dhabi. I've seen similar movies before and they rarely end well for the underlying asset. And then there's the matter of The Mr. T Gold Indicator; laugh all you want but be ready for some pity -- the performance speaks for itself and the A-Team movie is set for release in June.

Given the migration across the tricky trifecta -- an unfortunate evolution from societal acrimony to social unrest to geopolitical conflict -- the sad reality is that we could wake up one morning to headline risk that spikes both gold and crude, particularly if the tension stems from the Middle East and impacts the Strait of Hormuz.

Which brings us back to the point of this short but sweet column; looking at the chart below, one could argue that a "long crude-short gold" pairs trade makes sense given the chasm that's been created over the last few weeks. I'm in the process of legging into this trade but please know it's not advice. As I don't know your risk profile and time horizon, I couldn't possibly suggest that this particular bet fits for you.


Click to enlarge

Just sharing the process, as we're apt to do in the 'Ville. As always, I hope this finds you well.

R.P.

Also, don't miss Todd's Random Thoughts video segment on this topic below.



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Position in GLD, USO

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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