Time to wear the risk aversion hat

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Hello Friends,

The last two weeks have been an action-packed period for most of the markets. Looking at the actions listed below, it won’t be unfair to term it as an amazing period.

  • Gold surpassed highs of 2011 in USD terms
  • Star of the period had been Silver with a meteoric rise from 18 USD to 23 USD
  • Dollar Index at 2 Year low and below 3 Year MA
  • Dow, S&P, and NASDAQ covered all the lost ground of pandemic fall
  • Indian Markets crossed 11000 on Nifty

Safe heaven market (precious metals) and risk-on market (equities) both trading higher at the same time is a deadly and rare occurrence. We had been advising clients to be overweight on precious metals and historic highs had been rewarding, especially the mining stocks on overseas exchanges gained good percentages.

What next?

Be wise.

The first round of warning shot is already fired by Gold moving up to almost a decade high with ease. I stress the word ease, I hardly remember seeing any instrument moving with such ease at their historical highs. Otherwise, it would always be volatile and a natural pullback would be there but that is missing in precious metals.

It indicates to me that the action is yet to start and we have a long way upside. Another factor supporting this is the data on the number of deliverable contracts on COMEX. Never in the history of COMEX have we seen these many contracts for delivery, it is a record.

This is a clear indication of money moving into Gold for some larger debasement purpose, which means there will be pressure on the US dollar and Equity markets can meltdown. USD has already broken down its 3 Years Moving Average.

A lot can happen in the next few months, time to wear the risk aversion hat, the rally in equities in US and China has shown indications of resistance and thus every incremental percentage of the gain comes from very high incremental percentage of risk.

Collecting pennies in front of steam roller:

Unaware of change in risk-reward ratio, people chase small gains without being prepared for large risks. This practice of collecting pennies in front of a steam roller can be seen in long term investors as well as short term investors. This can be seen in how the world’s largest pension fund lost $165 bn in the worst quarter by having trade instruments like the Volatility Index in their portfolio to generate those extra returns.

Same happened with Canadian pension fund, which lost $2 Billion in their pension portfolio. To add those pennies to the returns funds managers indulge in including such untested instruments.

When risk comes knocking we hardly have time to adjust and thus the end result is most unpleasant. Wise would be to estimate events, which can blow up the risk, on a regular basis and adjust the portfolio accordingly.

Events to consider:

  • Reduced value of doles to the jobless in the US, crucial decision in the coming week
  • Reality of unlock down may strike hard, harder than the market expects
  • With no respite on COVID numbers, anytime we may have a new trend of locking down again
  • Reduced consumption and relative pressure on top lines of the companies
  • Instructions to close down consulate by US and China should not be ignored
  • Debasement of currencies
  • Gyration of the equities market in the last few days of the week,

In line with these events we have reduced exposure across the board on equities, commodities and we see action shifting towards the currency market. The incremental gains are not worth the incremental risk, so keeping cash for a good bargain is the better option for now.

Star of the period: Silver meteoric rise from $18 to $23

Drop a line to [email protected] seeking assistance in designing currency hedges for these challenging times. We are good at designing hedge plans for SME, MSME’s and IT companies to their advantage and slashing off bank transaction cost to a great deal.

Market Commentary

With so many important events, we would suggest a high level of cash and readiness to allocate capital to precious metals as we get more confirmations on the unfolding of events.


Globally equities had volatile weeks but managed to stay afloat. In the last few days, signs of exhaustion have emerged indicating a possible pullback in the coming days. With every passing day, we are moving towards the unchartered territory of risk. Incremental gains on equities are coming at a relatively higher risk. Lowest allocation to this asset class would be a wise thing to do.

Currencies: Action-packed weeks ahead

US Dollar Index (DXY) has broken below 3 Years Moving Average of 95.50 and confirms our belief that we are heading for a most volatile period in the currency markets. Tighten your seat belt if you are an exporter/importer and have exposure on USD. ECB unleashing Euro bond strengthens EURO on a short term basis. We maintain our positive bias towards GBP and Yen as they have moved in expected lines. USDINR pair may not benefit further from the decline in USD as we might be hearing about government borrowings to finance the deficit. IMF is estimating that India’s debt will reach 85% of the GDP from 72% due to the acute shortfall in government revenues.

Crude Oil

Rally in China triggered a move up to $45 on crude but if it fails to hold then we have lower levels to $38 in line. We would like to build long positions with full allocation on oil ETFs XOP, XLE, and UCO. Oil and other industrial commodities will remain our favorite long term buy on dips as we believe supply-side shock is unavoidable.

Metals: Gold Silver Copper

Our target of Gold $1900 and Silver $21 was comfortably met, it took a couple of months to build positions, and now is the time to lighten up but still we will retain exposure in it and rebuild on declines. Because the warning signals discussed above indicate we have a long way to go.

Our favorite will be the ETFs DSP World Gold Fund, GDX, and GDXJ.

Copper and other industrial metals

Copper has traveled as suggested in the last issue of Apaarr Notes and now it meets its stiff resistance at $6500. We would reduce longs in copper and wait for the unfolding of events to decide if the next buy can go in. Zinc would be still a relatively better metal to trade long for the coming period, so we can retain exposure to zinc.


These are information, views of best of minds, and my humble opinion, take the trade and investment decisions based on your risk profile, objectives and asset allocation. There are times we need to sit on cash and wait for the market to correct and there are times when we have to stay invested and allow the market to move up. In short, inaction in the market is the most rewarding act, once you are set on a clear plan. So fill up buying orders on asset class where there is a need to allocate funds and reduce priced up assets to keep cash for better times.

This is a complimentary note and can be circulated with friends and family members. Advisory is always one to one and this note has no relation to the advisory. We may share views but this piece is not to be considered as advisory. A note may have mention of various authors/videos/views, which are sourced from the internet and respective owners own them and have made it available free for all, it is reproduced here for awareness.

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Written by

Punit Sethia, Jul 26, 2020