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Order Flow - Achieving the mindset

  • #1,561
  • Edited 4:25pm May 7, 2011 3:57pm | Edited 4:25pm
Quoting CindyXXXX
How else will gold bulls liquidate? There would still be buying of gold with a selling of the dollar but the selling pressure caused by profit taking in gold would cause it to top out.

I think thats the sort of world where that would happen. Buyers of yesterday need buyers of today to get out

i fail to understand what you are saying. Maybe you can simplyfi ?

The whole point in any stop cascade/market crash is the lack of the new buyers willing to counter the selling pressure. Profit taking IS converting gold into cash (usd). This creates the demand for the dollar (but that's not the only reason). (there's confusion in my head right now )

ok, i may have some idea what you said but i would like to give you an example:


Say you buy 1 ounce of gold at 1500$. Then you sell it at 1000$. You lost 500$. That very same amount of gold swiched hands while 500$ was vanished meaning that there are now less dollars available !? Less dollars means higher value of dollar ? I'm tired, sorry if i'm dead wrong

Anyway, this is not the point. Dollar will not rise solely because gold falls. You have to think of the reasons why the gold rallied (and dollar fell) to understand why it's all but logical to assume that the exact opposite can be on the cards. There will be no such environment where continously (for a long period of time) dollar index gains and gold shoots up (don't scream at me on this one, i know of the exeptions).
  • #1,562
  • May 7, 2011 4:30pm May 7, 2011 4:30pm
Quoting lumesh
Say you buy 1 ounce of gold at 1500$. Then you sell it at 1000$. You lost 500$. That very same amount of gold swiched hands while 500$ was vanished meaning that there are now less dollars available !? Less dollars means higher value of dollar ? I'm tired, sorry if i'm dead wrong
The $500 vanished from your pocket and appeared by magic in someone's else
  • #1,563
  • May 7, 2011 8:19pm May 7, 2011 8:19pm
Quoting lumesh
ok, no offense but i think you got something really wrong here. You are calling a top on commodities AND a weaker dollar ?? In what world does that happen ? Or you are implying that the euro will be so strong that it'll clearly override the strength of the dollar when gold collapses ? Plus your timing is awful. What happens in a few months ? The end of the QE.

Europe is in the middle of a very big possbile debt crisis after U.S. (i have my reasons why i'm not mentioning Japan). Greece isn't the problem, contagion is the problem. Look up the exposure...
Hello Lumesh,

First off, I admire your thinking and analysis. I appriciate that you've thought through these things in a way that makes good ole common sense. My only problem with your view is that I don't beleive the world collevtively does things in the way in which they ought to be done. Human beings are stubbornly selfish, narcissistic, and greedy, it is these traits that drive financial markets. This is just of course my opinion, or my "simple man's" model of the markets. The interpretation of the markets you shared in your post is nothing more than the product of your own financial model that makes the most sense to you. The important thing is that each one of us here be fully confident in our opinions and trade the way our convictions lead.

As far as gold is concerned, I never actually called a top. I had a very simple idea--that the $1500 mark would induce profit taking, profit taking that could collapse the whole market. My approach was to get in short @ $1525 and add to the short above that level. So far I've made a few bucks, but like I said, the crazy people bent on the idea of $2000+ gold will not go down without a fight. I don't really care if they knock my stops out, I'm just trading my convictions. As price continues to climb, the incentive to get out will only increase, especially after this lovely sideshow we've seen in gold and silver. Eventually I'll get em.'

I think EU will pull above 1.45 in the next 2 weeks and continue onward and upward from there (as long as the drive through lights are on).
  • #1,564
  • May 8, 2011 3:30am May 8, 2011 3:30am
Quoting Scotty B
Hello Lumesh,

First off, I admire your thinking and analysis. I appriciate that you've thought through these things in a way that makes good ole common sense. My only problem with your view is that I don't beleive the world collevtively does things in the way in which they ought to be done. Human beings are stubbornly selfish, narcissistic, and greedy, it is these traits that drive financial markets. This is just of course my opinion, or my "simple man's" model of the markets. The interpretation of the markets you shared in your post is nothing...


fair enough.

Let's now switch back to order flow thinking
  • #1,565
  • May 8, 2011 3:49am May 8, 2011 3:49am
Quoting Adal
The $500 vanished from your pocket and appeared by magic in someone's else

Yeah, i know what you mean and that was probably a shitty example. I wanted to give you a simplified version of things where there are two people trading one ounce of gold where the initial gold owner didn't buy the gold but already had it and where the price was imagined higher and later put dollars behind it. But even then my logic is flawed....i think.

Truth is i'm unable really to give you a simple explanation of how gold weakness has a DIRECT relationship with dollar strength. I want to say that selling commodities creates demand for dollar but this is not justified as an explanation.

Maybe darkstar could help me out here.
  • #1,566
  • May 8, 2011 4:26am May 8, 2011 4:26am
Let me give this a try. As per my understanding:

I think what lumesh is trying to say is - Gold is dollar denominated. A downward movement would mean demand for more dollars. Considering there can be only so much dollars, it should lead out to dollar strength.

The confusion seems to be due to Scotty's statement wherein he bets on ending of gold rush and dollar weakness as compared to euro in next few months. I have under lined the statement as I think it provides perspective to what Scotty is saying. Thinking bearish gold and bullish euro within the same timeframe (say 4-5 mths) is confusing. The bet here is: Gold will fall eventually. The eventuality might not come right now. It is the same way the commentators talking about housing bubble back in 2006-07 but it dint really come until later on.
  • #1,567
  • May 8, 2011 5:08am May 8, 2011 5:08am
Quoting lumesh
Yeah, i know what you mean and that was probably a shitty example. I wanted to give you a simplified version of things where there are two people trading one ounce of gold where the initial gold owner didn't buy the gold but already had it and where the price was imagined higher and later put dollars behind it. But even then my logic is flawed....i think.

Truth is i'm unable really to give you a simple explanation of how gold weakness has a DIRECT relationship with dollar...

Ok, i got to some conclusions.

Maybe it's a question of whether the investor is a net winner or a net loser on the gold trade.

Hypothetically saying If there is purely net profit taking for example the next 200usd the gold goes down then that gold fall don't have a direct effect on dollar cause it is offset by new demanders for gold.

If however, gold goes down another 200usd which causes a lot of stop LOSSES from the gold play then this is where there is an excess net demand for the dollar.

So much for the direct effects

However this doesn't play much role, the biggest impact still comes from the reasons (like i said before) of why the gold rallied and dollar fell.
  • #1,568
  • May 8, 2011 8:01am May 8, 2011 8:01am
Quoting lumesh
Ok, i got to some conclusions.

Maybe it's a question of whether the investor is a net winner or a net loser on the gold trade.

Hypothetically saying If there is purely net profit taking for example the next 200usd the gold goes down then that gold fall don't have a direct effect on dollar cause it is offset by new demanders for gold.

If however, gold goes down another 200usd which causes a lot of stop LOSSES from the gold play then this is where there is an excess net demand for the dollar.

So much for the direct effects

However this doesn't...
I think one of the key points is that there will be demand for gold and oil, the oil exporters will get many dollars then they have all this dollars and they have to diversify because the dollar is falling, therefore they buy other currencies (EUR, GBP, AUD) and also gold, and not only oil exporters, generally speaking anyone in the world who gets paid in dollars, China.

If you see the price of gold at $1500, is that really that much, or is because the dollar has lost value besides increasing demand for gold.

It's like a vicious cycle as long as the global economic growth outlook stay more or less the same.

If the gold starts falling it will trigger a bunch of stop losses causing a stop loss cascade, the smart money might be waiting for the dust to settle and then start buying it again because the price is very attractive.

I think it's all about the money flow, where are investors putting their money.
  • #1,569
  • Edited 12:21pm May 8, 2011 8:17am | Edited 12:21pm
Quoting lumesh
If however, gold goes down another 200usd which causes a lot of stop LOSSES from the gold play then this is where there is an excess net demand for the dollar.
First off, I'm impressed with your analysis lumesh. You have really come a long way in the last year.

This part however is badly flawed. Yes gold is USD denominated, but it isn't the same USD that is priced on the forex market.

EUR/USD is a specific security. Its price is determined through a number of triangular value relationships with all the other currencies in the world. When EUR/USD rises, it is because either an aggregate of market participants bought EUR/XXX securities in excess what was bough in USD/XXX securities or they sold USD/XXX in excess of what was sold in EUR/XXX. Nowhere in the process does the value of gold come into play.

For someone to buy gold, they need to POSSESS USD. US domestic investors fund their accounts in USD and if 100% of the investment in gold is done by US domestic investors, the value of gold will have zero impact on the USD exchange rate because all the transactions are between people who already possess the USD pre-requisite. Remember that for USD/XXX to change, it has to be exchanged for that XXX currency. That doesnt happen when everyone already owns USD.

If 100% of the gold investment is being done by, lets say, Japanese investors, this will have a quite different impact because they generally hold their funds in JPY. In order for a JPY holder to buy gold he must first sell his JPY for USD. This leg of the process would be USD positive for obvious reasons. With the USD in hand, that JPY investor can then buy gold.

Taking this example further, lets assume that price goes up by $100 and those Japanese investors sell their gold. The exchange of gold for USD has no impact on the dollar because for forex purposes gold and USD are the same thing. If the Japanese investors take their profits and invest in US real estate, you could see gold fall and US real estate rise, but the dollar still wouldnt move.

If, however, those Japanese investors saw no good reason to keep their funds denominated in USD, they would convert it back to JPY (or some other currency) and invest it elsewhere. This would be USD negative because that funds conversion would in effect be selling USD/JPY. JPY rises and the dollar falls. On a triangular basis this will improve the price of EUR/USD through the EUR/JPY leg.

So in effect you could very easily see gold and the dollar falling at the same time. It really depends on a lot of factors but at the pure order flow level (and eliminating all other potential drivers of that flow) if most of the investment in gold is done by foreign investors, when they sell and repatriate their funds, the price of both assets will fall.

Thats not to say it will happen... I'm not taking a position in this debate (i think you guys are doing an excellent job of it already ). I just wanted to point out how what scotty is talking about COULD happen.

Luck be with you

PS - lumish, I saw your email and plan on responding later today.
  • #1,570
  • Edited 9:59am May 8, 2011 9:43am | Edited 9:59am
Quoting Darkstar
When EUR/USD falls, it is because either an aggregate of market participants bought EUR/XXX securities in excess what was bough in USD/XXX securities or they sold USD/XXX in excess of what was sold in EUR/XXX.
Thanks for that DS, might wanna check the above though
Time hides Nothing
  • #1,571
  • May 8, 2011 10:19am May 8, 2011 10:19am
Quoting CindyXXXX
Thanks for that DS, might wanna check the above though
I think Darkstar meant to say "when EURUSD rises"
  • #1,572
  • May 8, 2011 10:37am May 8, 2011 10:37am
Quoting seagreen
I think Darkstar meant to say "when EURUSD rises"
Yeah, I think we all can figure that much, sorry just being annoying and technical, just thought I'd mention it in case a new guy starts hitting buy instead of sell CAn imagine him on the phone to his broker "Whua?? What you mean the EUR rises when people are buying it, not what DS told me"
Time hides Nothing
  • #1,573
  • May 8, 2011 11:23am May 8, 2011 11:23am
Quoting CindyXXXX
Yeah, I think we all can figure that much, sorry just being annoying and technical, just thought I'd mention it in case a new guy starts hitting buy instead of sell CAn imagine him on the phone to his broker "Whua?? What you mean the EUR rises when people are buying it, not what DS told me"
DS also suggested to read "The Way of the Dollar" so now I'm checking what moon is doing before making a trade.
  • #1,574
  • May 8, 2011 12:00pm May 8, 2011 12:00pm
Quoting Darkstar
For someone to buy gold, they need to POSSESS USD.
To be honest this is the first time I hear someone saying this. As far as I know, gold futures are denominated in different currencies on non-US exchanges. Also, the purchase of physical gold can be completely seperated from the US dollar as well. Arbitrage keeps global gold prices linked. Please correct me if I'm wrong.
The nail that sticks out gets hammered back in
  • #1,575
  • May 8, 2011 12:22pm May 8, 2011 12:22pm
Quoting CindyXXXX
Thanks for that DS, might wanna check the above though
Thanks brother. I was half asleep when I wrote it and wasn't paying close enough attention. The original post is fixed.
  • #1,576
  • May 8, 2011 12:30pm May 8, 2011 12:30pm
Quoting Noloqy
To be honest this is the first time I hear someone saying this. As far as I know, gold futures are denominated in different currencies on non-US exchanges. Also, the purchase of physical gold can be completely seperated from the US dollar as well. Arbitrage keeps global gold prices linked. Please correct me if I'm wrong.
That is ofcourse quite true. Please accept my apology for oversimplifying. I wasn't intending to write up a comprehensive disertation on the structure of the gold market. I simply wanted to point out that just because something is demonimated in a specific currency, that doesn't mean changes in its value will impact the currency. For exchange rates to change, there has to be an exchange of one currency for another.
  • #1,577
  • May 8, 2011 2:26pm May 8, 2011 2:26pm
Hi,


thanks for the clarificaton, i get what you are saying and i agree with you all the way. I was uncomfortable writing about the theory in the first place cause not everything made sense. You cleared that up now.

I guess i was caught up with the mainstream media logic where news points out that when commodities fall then they interpret it the way that: "investors flee from commodities and converted their money into cash raising the demand for the dollar"...

i might have misunderstood the news (although i'm pretty sure i've heard excatly that explanation....yes, now i remember, news have clearly pointed out that, long story short, oil and dollar have negative strong correlation thus leaving the impression that they are directly linked).


Quoting Darkstar
So in effect you could very easily see gold and the dollar falling at the same time. It really depends on a lot of factors but at the pure order flow level (and eliminating all other potential drivers of that flow) if most of the investment in gold is done by foreign investors, when they sell and repatriate their funds, the price of both assets will fall.

Thats not to say it will happen... I'm not taking a position in this debate (i think you guys are doing an excellent job of it already...
Sure, in theory and under those circumstances gold could go down while dollar goes down. But the reality is that all markets are closely related:

commodities push up commodity currencies against dollar and the opposite happens when commodities come down.

How all this affects eurusd (if at all) is for you to decide. If gold crashes WITHOUT evident global slowdown in sight and WITHOUT causing uncertainty and lack of confidence then yes, it should have zero effect on THAT pair.

thanks for debating, i am very well aware that it's off-topic
  • #1,578
  • May 8, 2011 4:17pm May 8, 2011 4:17pm
Who else here sees the Eurozone Issues as an interesting exercise in Game Theory/Gamesmanship?
  • #1,579
  • May 8, 2011 4:24pm May 8, 2011 4:24pm
Quoting xXTrizzleXx
Who else here sees the Eurozone Issues as an interesting exercise in Game Theory/Gamesmanship?
Me. There are game theoretic elements present in the eurozone for sure.
The nail that sticks out gets hammered back in
  • #1,580
  • May 8, 2011 11:41pm May 8, 2011 11:41pm
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