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Are You Marked To Model?

IMG Auteur
Published : February 01st, 2012
1197 words - Reading time : 2 - 4 minutes
( 2 votes, 5/5 ) , 3 commentaries
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FOLLOW : Cds, Gold Market, Swaps





1.    If a tree falls in the forest, does it really make a sound if nobody hears it fall?  Click here now to view a falling OTC derivatives tree being marked to “it never made a sound” model.

2.     In the simplest terms, credit default swaps (CDS) are a financial insurance product used heavily by hedgers and speculators in the government debt arena.  

3.    A lot of investors thought that a huge deflation would occur when the OTC derivatives written on real estate blew up, but what they didn’t anticipate was that rule changes would be made by the Financial Accounting Services Board (FASB).  

4.    The FASB allowed banks to value OTC derivative products like bonds, with a maturity date.  OTC derivative accounting was legally changed from “mark to market” to “mark to model”.

5.    The deflationists were almost destroyed by the FASB move, as gold surged from about $680 to $1920.  They have re-emerged since the Greek government has taken centre “default stage”.  As you will see, the deflationists are likely to meet their mark to model maker once again.

6.    Companies like MF Global thought they could make big profits by using investor monies to make bets with CDS products.  Their view was that the Greek government couldn’t pay what it owed, and that failure would trigger a default event. They were wrong because they didn’t understand how far the banks have taken the concept of mark to model accounting.  

7.    In the above document provided by the International Swaps and Derivatives Association (ISDA), you can see that how the ISDA defines a credit event (CDS payout time) is open to substantial interpretation by the ISDA itself.   

8.    If you take the time to read the document carefully, you will realize that for all practical intents and purposes, the ISDA votes on whether any kind of payout can be made to the CDS holder, because they vote to decide if a “credit event” has occurred.  

9.    Can you imagine your situation, if at the end of the day the people who are shorting your gold stock took a vote amongst themselves to decide what the closing price for the day would be for your stock?

10. In the biggest picture, that is essentially the situation that the CDS holder is experiencing.  Simply put, a default becomes “not a default” when the ISDA votes that default out of existence.  The bottom line is that “Team ISDA” will likely put “Team Deflation” into the dustbin, and the only question that really matters is, are you onside?

11. If so, I’d like you to give the gold chart a kiss this morning.  Keep it simple, sweetie.  Click here now to view the simplest view you can have of the gold market.  Note the three sell signals on the 14,7,7 series of the Stochastics indicator that I have highlighted.

12. Example A shows the gold price blasting three hundred dollars higher after the Stochastics crossover sell signal was given.  Example B shows the gold price declining rapidly after a Stochastics sell signal flashed.  What will “Example C” bring to the gold market?  What will happen when the lines on that Stochastics indictor cross, as they are threatening to do now?

13. The bottom line is that you can’t know the answer.  Selling huge amounts of gold because it is technically overbought can have disastrous consequences for you.  You can be left standing in the train station while a gold bullet train speeds away.

14. Moderation brings the best wealth-building results.  Selling a bit of gold into this strength is wise.    

15. The professional investor doesn’t buy gold because, “It’s about to rally!”, and they don’t sell gold because, “It might fall down!”.  If gold is falling in price, you need to buy a small amount of it.  If gold is rising in price, as it is now, you need to book some light profits.  End of professional investor story.   

16. Using theories of where the price of gold may go next to buy and sell huge amounts of gold is “market madness”.  All “gold is crashing!” nonsense that occurred into $1525 has now been marked to “skeleton in the closet” model.  The epic loss-booking has been replaced with new nonsensical stories that gold is going to infinity any day now, so you have to buy in enormous size.   The unfortunate bottom line is that primal urges continue to dominate the actions of amateur investors.  

17. Operate on the gold price gridlines not as a sea-changing prophet, but as a capital placement machine.  You understand that gold is the ultimate asset, so you place capital into it like a machine on a factory production line.   

18. Note the four HSR (horizontal support and resistance) lines that I’ve highlighted on the above gold chart.  They are created by support and resistance at the prices of $1640, $1700, $1770, and $1800.  

19. Based on this HSR, you would place orders to buy gold in the $1700 and $1640 price area.  Place orders to sell gold in the $1770 and $1800 price area.  Keep it simple.  I would prefer that you place no buy orders unless gold has fallen $50 to $100 from these highs, regardless of where any support is sitting.  

20. I think the average daily range for the gold price will increase dramatically.  Unfortunately, the average high speed (flip) trader lives in a world where a $100 move in the gold price is mistakenly viewed as critically important.  I would suggest that the flip trader lives in a make-believe world.  The only thing real about the flip trading world is the enormous size of the booked losses that are experienced by the vast majority of its citizens.  If you are living life as a flip trader who is obsessed with the supposed importance of the next $100 move for the gold price, you might consider the possibility that in the gold world, you are an illegal alien.

21. Default and quantitative easing are not the themes of this financial crisis.  Surprise is the theme, and you need to embrace surprise, rather than fight or outsmart it.  Don’t try to become an expert at predicting surprise in a crisis of this magnitude, if you want to get richer.  You can only embrace the theme of surprise by becoming a risk capital placement machine.  

22. Simplicity is the fuel of the successful financial engine.  Is it time for a fill-up?

23. Click this key silver gridlines chart now.  Support sits at $28.50 and $31.  Those are your simple buy points.  On the profit booking side, you’re doing it now in the $33.50 area, and you’ll sell more at $35.50 and $37.  

24. Take about 1% of your position off the table at each sell point, and add about 1% to your position at each buy point.  Most investors “only” trade about 100 times too large for their financial britches!

Special Offer For Website Readers: Send me an Email to and I’ll send you my free “Keep It Simple, Sweetie (KISS)” report, highlighting the simple actions you need to take here and now in the GDX and GDXJ markets!






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Stewart Thomson is a retired Merrill Lynch broker. Stewart writes the Graceland Updates daily between 4am-7am. They are sent out around 8am-9am. The newsletter is attractively priced and the format is a unique numbered point form, giving clarity of each point and saving valuable reading time.
Latest comment posted for this article
Good call :) Suffice to say that watching prices go straight through arbitrary and subjective lines on a chart has consistently allowed me to take new shirts off other peoples' backs. Read more
S W. - 2/1/2012 at 7:33 PM GMT
Rating :  2  0
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Comments closed
  All Favorites Best Rated  
Stew, put on a nice shirt, we have company...
Rate :   1  0Rating :   1
Good call :)
Suffice to say that watching prices go straight through arbitrary and subjective lines on a chart has consistently allowed me to take new shirts off other peoples' backs.
Rate :   2  0Rating :   2
If an article and advice as bad as this falls in a forest would anybody take any notice.
I certainly hope not.


There is a huge difference between a "Professional Investor" and a Professional Trader and demonstrated here is complete ignorance of that fact.

Sorry but that's the way I see it.
Rate :   2  2Rating :   0