July 1, 2010

Is Gold an investment?

Or is it just a trade?

Because if it’s a “trade”, gold “investors” are in big trouble…

OK…We all know that the bull market in gold is a front page subject, every day, on just about any financial website you want to look at. This is NOT some “stealth market” in which any trades higher are regarded as a surprise…All of the supposed reasons for gold to keep going up are fully understood and now routinely accepted as quite logical by seemingly 99% of the talking heads and market analysts on the planet.

My two cent opinion, however, is Gold has now become one of the potentially biggest short TRADES I’ve ever seen in the futures arena. Admittedly, Gold is “precious”, and a pound of gold is certainly worth more than an pound of sugar, but that doesn’t mean it is worth anything even close to $1200 an ounce.

As I’ve written over and over, this whole investing thing is a game, based on nothing more than mob psychology and mass market perceptions, and in reality, there is no “official” value for any of these symbols flashing on screens around the world…No market is ever at equilibrium. Everything is always swinging back and forth between overvalued and undervalued…and Gold, I believe, has gone off the scale as far as being overvalued.

To me, if you buy Gold at $1200 an ounce, unless you do think it will generally appreciate semi-endlessly from this price level, you are spending your money on a “trade” (and one bound to lose, I’d add), implying that at some point its ascent in value will end, and you’re going to need to know what no one ever knows, which is, “when to get out”…Or, if you are just now buying gold as an “investment”, the first thing I’d say is you are maybe doing so a little late in the game…and beyond that, if it is an investment, as it pays absolutely no interest, and actually costs money to own in any real quantity, and you won’t be able to use it for anything, you have got to be assuming that its value is going to appreciate in healthy percentages for year after year after year. I mean, if you buy it now as a long term investment, from a risk-reward standpoint, I would think your annual percentage gain expectations would need to be in AT LEAST the 10-15% range, as after all, this IS a commodity and with 25% commodity “retracements” being about as common as flies around a cattle ranch, if you buy $1200 gold only looking for something like 7% annually, I will tell you your investment plan is basically flawed…In other words, risking 25% to make 7%, or even 15% for that matter, just doesn’t make good sense…Even so, if Gold is an investment, that is, something you can hang on to and expect to make a decent return over the long term, if it’s going to appreciate 10% a year, that means it has to go up, and STAY UP, and do that year after year after year…And if it COULD do that…appreciate 10% annually, what you’re talking is Gold around $2100 an ounce in another 5 years…I mean, really, can you see that? Do you think Gold is really worth $2100 an ounce?...

The point behind all this is, GOLD IS A TRADE, not an endless bull market, and as a trade, it is subject to the same bearish cycles as everything else we trade…And I firmly believe one of those bearish cycles is dead ahead, and in fact, may have already begun.

I CONTINUE TO THINK THE GOLD MARKET IS A MASSIVE SHORT TRADE. THERE IS NO SIZE MOVE ON THE DOWNSIDE THAT WOULD SURPRISE ME, AND I SEE TODAY’S $40.00 DECLINE AS NOTHING MORE THAN A HICCUP…AS I HAVE BEEN SAYING, I LOOK FOR AT LEAST A $100+ DOWN DAY OR TWO AS GOLD COLLAPSES…I BELIEVE A MOVE TO $700-$800 AN OUNCE (FOR STARTERS) IS A DISTINCT POSSIBILITY, WITH THE MARKET MAYBE TAKING NO MORE THAN A FEW MONTHS TO ACTUALLY DO SO.

I do not believe the global economy is going down the tubes. I do not think the world currency system has even the slightest chance of being replaced by “gold money. I do not think any noticeable degree of inflation is on the horizon (and certainly NOT hyperinflation). I do not think the US Dollar is going to be replaced as the world’s reserve currency, nor is the Dollar going in the tank as has been absolutely dead wrongly predicted by the analytical community for several years now…In short, I believe all of the supposedly “logical” reasons you hear, some which truly border on the absurd, as to why we should all be buying gold at $1200 are totally backwards…and not too far down the road the trading masses will be looking back and saying, “Why didn’t I see that? It WAS so obvious.”

How many times do you have to see this to recognize the potential trading opportunity…Remember how hopped up all the suits and media were when Oil was at $150…and supposedly headed for $200? And how at $4.00 Gasoline, they started talking about $10.00? Folks, this is the same thing…Let’s face it…Would you go out and load up on IBM if there were salesmen coming on TV every 15 minutes telling you “Everybody needs to own this” and “How to buy IBM”? Hell, no. You’d smell a rat. You’d run the other way…So how is gold any different?

Picking tops is generally a bad idea…But I’m staying on this one because I do think it is a giant trade…I know a lot of you have been beaten up by the Soybean Oil (there’s hope lately!), and are just not that excited about writing checks to the commodity market in general, but I have not had a single individual contact me and say, “I want to do this short gold idea”…Does that mean anything? Maybe not. But my instincts and experience tell me it does. NOBODY wanted the bonds and look where they are…I can’t help but think Gold is the same sort of thing, only on the short side.

Give me a call if you’re interested…charts and some option prices follow…

Thanks,

Bill

866-578-1001
770-425-7241

Here’s what the Crude market did look like before all the bullish “logic” fell apart…

If you’re interested, there is a mini-future in which each $1 move = $33…

I STILL SAY BE LONG THE TREASURY BOND MARKET….

 AND SOYBEAN OIL IS TRYING TO CONVINCE ME THE PAIN IS OVER…We are still short and still adding to those shorts…