These days, the only thing I know for sure is that fear is as overbought as ever. This is starting to get ridiculous: 30-year treasuries below 3%; gold up for the year; and risk averse investors paying Uncle Sam for the right to carry his wallet. Before I try to explain my position, let's just say I have a healthy dose of skepticism by all things spewed by insiders, lawmakers, central bankers, and media types.
The two ongoing fear trades are treasuries and gold, and both have had a very good 2008. It's not rocket science to say they should have a very difficult 2009. At some point, people will tire of being afraid. And when......and I mean 'when'...this trade reverses, the pain will be very bad. I understand the central bankers have entered a new paradigm of 0% fed funds, but what are real rates? And real rates are possibly scary high; in fact...maybe...contracting monumentally. What is the Federal Reserve running from? With the proverbial kitchen sink action today, is the Fed fighting a full scale deflation war? Gold looks very vulnerable and deflation is a huge risk to this metal.
Platinum, silver, and copper have all seen the light that is deflation, but gold continues to whistle by the graveyard. Now, treasuries could be the most vulnerable, and I would stay very clear except for a very short hedge. But gold........I can't see where treasuries and gold co-exist as best in show. Somebody owns a worthless ticket, maybe two worthless tickets. All commodities are down 30-60% for the year except for gold. Oh yea....it's a conspiracy. If you believe in 'the small investor is always wrong' then try and buy some gold on your street corner. In fact, I hear gold prospecting is making a new comeback.
I understand the re-inflation trade. Worldwide central banker intervention, government stimulus packages, bailouts upon bailouts, but gold investors have already been paid. That trade is over, we are in recession or depression, and asset values fall unless you own gold. The top in gold is being delivered by the marginal buyer - the fear buyer. And the fear bubble is about to pop! It's time to be long risk and short safety. Gold bugs should know that when the world sees it their way, it must be the wrong way. I'm looking to short gold, but waiting for a technical breakdown. Gold as part of a diversified portfolio is good, but I would prefer SLV over GLD.
Looking to short GLD or buy puts on GLD
Disclosure: Author holds a long position in UYG, no position in SLV or GLD.