By Nigam Arora
According to algorithms at The Arora Report, the “smart money” has stepped into gold ahead of the Italian referendum.
There is merit to consider buying gold or a gold miner today ahead of the Italian referendum. The risk/reward is asymmetrical in favor of buying. In plain English, if the referendum is a “no,” there is a $40-$80 upside potential, but the downside potential is $10-$20 if the referendum is a “yes.”
If the margin of victory of a “no” vote is large, the momo crowd can drive gold up $150 to $200 over perhaps a week to 10 days.
The chart linked below shows first target zone, and second target zone if the vote is a “no.”
The smart money steps into gold
From today's Arora Report Morning Capsule:
"In a rarity these days, [the] smart money is lightly buying gold. Perhaps the reason is to guard against a negative outcome in the Italian referendum. If the outcome is a 'no', gold can easily jump up $40 to $80.
In another rarity, the momo crowd is selling gold. It appears that the reason for selling is that the momo crowd has incurred huge losses in gold and now they cannot take the pain."
Over the years, The Arora Report has refined its highly specialized algorithms that detect footprints of the smart money in precious metals using trading data from across the globe..
The fly in the ointment
The reason we are not able to give an official signal to buy is that there is no good way to calculate the probability of a “yes” vote or a “no” vote. As our long-time readers know, our ZYX Change Method and ZYX Allocation Model are rigorously analytical and depend on data.
What to buy
Most investors may consider buying the SPDR Gold Trust ETF (PSE:GLD) today in the zone of $111.00 to $112.36. GLD is trading at $112.09 as of this writing. For those using different instruments, the gold equivalent price is $1177.
Experienced, aggressive investors may consider buying the Direxion Daily Gold Miners Index Bull 3x Shares ETF (PSE:NUGT) . NUGT is a triple-leveraged gold miner ETF. The gain in NUGT in the event of a “no” vote could be up to 500% more compared to buying GLD. As a matter of caution, think about the flip side before buying NUGT. The flip side is that your losses will also be about 500% more than if you bought GLD.
Based on your own risk preference, a good compromise may be buying the iShares Silver Trust ETF (PSE:SLV) . Please note that the risk reward in SLV is not as favorable as GLD. SLV may see about 40% more upside than GLD, but 100% more downside than GLD.
Investors may also consider the VanEck Vectors Gold Miners ETF (PSE:GDX) . GDX has about 100% upside compared to GLD, but only about 60% downside compared to GLD.
As a full disclosure, in totality we have large short positions in precious metals and miners with large unrealized gains. These short positions include GLD, SLV, Silver Wheaton , Barrick Gold , Harmony Gold Mining (NYS:HMY) , Coeur Mining (NYS:CDE) , ETFS Physical Palladium (PSE:PALL) , and ETFS Physical Platinum (PSE:PPLT) . We are hedging these positions 100% with GDX before the end of the day. It is simply prudent to control risk.
Italian referendum details
Italians will vote on a constitutional referendum on Dec. 4. If approved, expect the most extensive reforms in the Italian government since the end of monarchy. Italian Prime Minister Matteo Renzi is the architect of the referendum. For months the polls had been in the “yes” camp and the consensus continue to be a “yes.” However, four polls published on Nov. 18 show the “no” camp was leading. Under Italian law, these were the very last polls allowed.
After Brexit and Trump, it is simply not prudent to 100% believe the polls or the consensus.
If Renzi loses, it may indirectly start a sequence of events leading to disintegration of the eurozone. There are three opposition parties in Italy, all favor exiting euro. As a full disclosure, we have a position in inverse euro ETF (PSE:EUO) and also short position in euro ETF (PSE:FXE) .
At least in theory, if the “no” camp wins, it should have a major negative impact on the U.S. stock market, the euro, Italian stocks (PSE:EWI) and European stocks (PSE:HEDJ) , and a major positive impact on U. S. bonds, the dollar and the yen.
In plain English, you could wake up on Dec. 5 to see complete reversal of trends in place since Trump's election. Watch out for downside in ETFs (PSE:SPY) , (NAS:QQQ) , (PSE:IWM) , (PSE:TBT) , (PSE:TBF) and (PSE:YCS) , as well as upside in ETFs (NAS:TLT) , (PSE:TMF) and (PSE:FXY) .
Be aware of cross currents. Before buying, please read “Potential gold-import ban by India could be biggest bombshell since Nixon.”
Please keep in mind what around here has come to be affectionately known as Nigam's Second Law of Investing, "No one knows with certainty what will happen next."
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article and/or may take positions in securities described in this article any time. All recommended positions are reviewed daily at The Arora Report and subscribers may receive additional information in real time not available to the readers of this article.