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Sept. 13, 2005

Short/Sell Gold

I suppose they are out there but I have seen virtually no opinion suggesting the Gold market could be seriously going down from here. All the talk seems to be "Inflation is coming!!" and gold is therefore "headed for $500 an ounce". Maybe everybody is right but I see it differently.
What you can note (on the chart below) is Gold actually made its high in November of last year and has since just been rocking back and forth in $20 to $40 swings. In spite of the fact Iraq has only gotten worse, and Iran is supposedly pursuing nuclear weapons, and terrorist attacks/threats continue (London for one), and OIL HAS GONE THROUGH THE ROOF (potential inflation).....In spite of all that, Gold closed today exactly where it started this year....I may be wrong, but if Gold has not responded to all of those events, my guess it has done about as much as it is going to do on the upside, and is now overloaded with speculative buyers....For this and other reasons, I think gold is primed for a big fall.
I am selling futures and buying puts in the December contract shown below. Essentially I see the past 9 months as a consolidation that is long overdue to move hard one way or the other. Per the most recent Commitments of Traders report (as of 9/6/05), there are 225,942 speculative longs in COMEX gold as opposed to just 66,397 shorts. While this does not mean gold has to go down, when I see a major consolidation jam packed with everybody on the buy side of a market, I prefer to bet on seeing what happens when/if they start running for the exits....Most markets tend to go down a lot faster than they go up and gold is anything but an exception. In fact, my first real baptism in futures came in this market in February, 1983 when I experienced a 5 day $100 drop while having all my clients on the long side....and there were no options then! Not that I am anticipating anything like this, but I've included the chart below just for old times' sake. That one week debacle was the first time I considered quitting this business....and often wish I'd had the sense to do so...As you can easily imagine, as a futures broker, one does sort of live on the edge...ALL the time. 
Enough said....Although I do believe it is highly significant that gold has not responded bullishly to the events of the year, my reasons for being bearish are probably irrelevant....I just think Gold is going down and has a good shot at dropping sharply below the lows for the year, taking it somewhere close to the $400 level. If I am wrong, I probably will be wrong in a big way, in which case the two puts to every call strategy should take good care of us.
Give me a call if you have an interest....I do think this is a "perfect 2 & 1". What Gold shouldn't do is just sit here where it is....
Thanks much,
Bill Rhyne

Here is a good example of "anything can happen in futures".....
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