A Simple Post on Gold

This is going to be the most subjective and least quantitative post out of the 500 odd posts I have written. I am not a gold bug, and while I have written that gold shares are attractive relative to gold in the past, I don’t see a lot of strategic value of gold to a portfolio (tactical, yes). Gold is currently above both its 50 and 200 day SMAs.

That having been said, and this is probably an Occam’s 5th Grade level observation, but is there anyone out there that believes that if/when gold breaks through the 1000 level, it doesn’t zoom straight to 1300 or 1500? Once that huge psychological barrier of 1000 is broken (it has already been tested once) I think the sky is the limit.

A simple strategy would be to buy gold (futures, GLD, or gold shares are probably even better than GDX) call options far out of the money. Since I have no idea when gold might break 1000 (if it ever does) it could also make sense to buy a call spread and keep rolling them over until gold gets to 1000.

Just a thought.

PS If there is anyone who doesn’t think that risk management is important, then you clearly don’t know anyone who (still) owns Russian stocks.

Comments

[Bad Dog:]

I didn't say I didn't own gold. But like any sensible person, I own a variety of assets. I just don't happen to think that any part of the Titanic is any safer than where I am. And I am old; so it doesn't really matter in my case. Kind of too bad for you if you are young. You are the one who will have to suffer, not me. I have already had a long and happy life.


On Jan 29 06:18 PM yellowhoard wrote:

> Thank god for liberal dems such as yourself BadDog. My investment
> in silver and gold is guaranteed to continue moving up as long as
> you and your homies are steering the ship.
>
> Good luck with those bonds!

Jan 30 12:44 AM

[MGA_1:]

Hmm... when people lose faith in real estate, lose faith in stocks, lose faith in govt bonds, where's all the money going to go? Gold may not be the beneficiary, but then again I think that it may eventually be considered the last place of safety.

Jan 30 12:54 AM

[Conan the B...:]

Bad Dog: My body is old, my mind is functional and with age comes not only perspective but also a better memory of what actually occurred the last time around.

1966, Dow 1,000, a 16 year trading range and a stock market Bubble, a housing Bubble, an Oil Bubble and a Gold Bubble in between until finally in 1982, an upward move above 1,000 to stay. I may even have a WIN button somewhere along with my Mood Ring.

Everyone wants to pick the Bottom, what's the rush, direction will always win in the long run.

IMHO

Jan 30 03:46 AM

[Barking:]

I havent really liked gold/silver over the years...it doesnt do ANYTHING...it just sits there...but thats NOW what I like about it the most.

BAC has assets of 1.8 trillion....and derivitives of 40...yeah FOURTY TRILLION! Our financial institutions are insolvent and headed for Govt take over. IF...and I say IF...the dollar breaks down...(Im not sure it can because it has to break down againist another currency)...but if it does gold will EXPLODE !! Right now you are seeing the dollar and gold rise together...because they are being viewed as the last safe places to be....and the clock may be ticking on the dollar.

Right now Im 50% Treasury Money Markets, 40% gold (CEF, GDX & bullion) and 10% in a trading account for short positions) Best of luck to all of you !!

Jan 30 08:53 AM

[Vigilance:]

If there's too little gold to function as a medium of exchange, seems to me that's a nice problem than when there is too much paper money. Maybe you've all heard of the man in Germany with a wheel barrow full of the old marks...Someone dumped the marks on the street and stole the wheel barrow.
Gold has been a medium of exchange for thousands of years, which is to say it has outlasted every paper currency. Like a lock pick to a burglar, paper money is a convenient theft mechanism for politicians. It's pretty difficult for politicians to dilute the value of gold but easy to do so with paper money when they have a partner in crime like the so-called Federl Reserve. By inflating the amount of paper money, they water down the soup but gold is not soluble.

Jan 30 08:57 AM

[foxy 44:]

yes, Maxe

Everyone i read about on here assumes gold is a "sure thing, one way bet", this alone is enough for me to start thinking of selling gold. It looks as though gold will be the "last bubble".

but not before 2011

because too many TARP kill the treasury bonds

Jan 30 09:10 AM

[oldgoldbug:]

chisltetoe - I have been thinking the same thing: way too many dollars, lots more coming, FED beginning to buy all kinds of bond assets with newly created money, 2.5 Trillion of debt sales in 2009 to finance the big mess, government "saving" the economy,- making value judgments as to who stays and who goes - it just goes on and on.
The upper price of gold is unknowable at this point - your calculation is as good as anyone's. The markets are sure acting like no impediment stands in the way of higher prices. Silver and oil may be the real sleepers as there is just not enough liquidity in the gold market should any significant amount of the cash on the sidelines decide to pile in.
The recent action of the Treasury market certainly gives one reason for pause. One thing we can guess - with TARP and coming children of TARP, the banks will certainly want to "help" the government meet its debt challenges. It looks like they will do it with newly created FED dollars. Yikes!

Jan 30 09:36 AM

[frank90291:]

I know it's ridiculous, but I bought some GLD shares early in 2005 and have been adding and subtracting based on 200d SMA. When GLD was at $75.00 I started adding more and now use a 600d SMA and keep moving my "stops" accordingly......
I know, I know, I know, I'm nuts, so maybe I'll buy some C, F, MSFT, QQQQ to go with my GLD and big macs (MCD). That way I'll have a well balanced and diverse folio............
Actually, it's a good thing to have lots of cash and hunker down because this mess will last for a long time..... The great transfer of wealth has begun and will grow more intense with the current administration and it's kool aid supporters who actually think the screwups in government can do something right.......

Jan 30 10:48 AM

[MGA_1:]

Gold doesn't do anything, *but* it's a store of value especially when your currency is being devalued. Investing also has it's cycles. i'm thinking the next 5 years will not be good for stocks, but instead, commodities. When the time is right, it's out of commodities into stocks.

Jan 30 11:26 AM

[auto44:]

There are very few people writing here and most see things the same way. Don't make market decisions based on what we say. We are a very small samplng of sentiment.


On Jan 29 10:56 PM maxe wrote:

> Everyone i read about on here assumes gold is a "sure thing, one
> way bet", this alone is enough for me to start thinking of selling
> gold. It looks as though gold will be the "last bubble".

Jan 30 12:15 PM

[auto44:]

I expect all currencies to break down against gold. The price is rising in all currencies not just the dollar. I am only 10% invested in gold as at this point I think weakening powder is better than burned powder.


On Jan 30 08:53 AM Barking wrote:

> I havent really liked gold/silver over the years...it doesnt do ANYTHING...it
> just sits there...but thats NOW what I like about it the most. <br/>
>
> BAC has assets of 1.8 trillion....and derivitives of 40...yeah FOURTY
> TRILLION! Our financial institutions are insolvent and headed for
> Govt take over. IF...and I say IF...the dollar breaks down...(Im
> not sure it can because it has to break down againist another currency)...but
> if it does gold will EXPLODE !! Right now you are seeing the dollar
> and gold rise together...because they are being viewed as the last
> safe places to be....and the clock may be ticking on the dollar.
>
>
> Right now Im 50% Treasury Money Markets, 40% gold (CEF, GDX &amp;
> bullion) and 10% in a trading account for short positions) Best of
> luck to all of you !!

Jan 30 12:23 PM

[secmaven:]

Gold has been in a bull market for eight count em eight years. Are the fundamentals of the fiat money systems of the world such that this trend is going to reverse?

Jan 30 01:40 PM

[NYTReader:]

Buy gold because of the 1st chapter of A Mathematician Plays the Stock Market: "Anticipating Others' Anticipations"

Jan 30 02:03 PM

[WorldBeta:]

Lots in the academic literature on round numbers. One example:

"Currency Orders and Exchange Rate Dynamics: An Explanation for the Predictive Success of Technical Analysis.” - Osler, The Journal of Finance 58(2003):

"This paper shows that requested execution rates for stop-loss and take-profit orders cluster at round numbers, consistent with existing evidence on limit orders in stock markets. Its also shows that the pattern of clustering differs across order types and could produce the price behaviors predicted by technical analysis. Executed take-profit orders cluster more strongly at round numbers than do stop loss orders. Since take-profit orders should tend to reverse price trends, exchange rates should tend to reverse course at round numbers when they hit take-profit dominated order flow. Executed stop-loss buy orders cluster most strongly just above round numbers, and executed stop-loss sell orders cluster most strongly just below round numbers. Since stop-loss orders should tend to propagate trends, exchange rate trends should be relatively rapid after the rate crosses a round number and hits stop-loss dominated order flow."

Jan 30 02:21 PM

[bricki:]

Inflation play: Maybe over decades. Shorter time scales don't show good correlations.

Untethered to economics? Historically not so, at all. Gold is generally negatively correlated with stock market returns. Not so much with the general economy.

Flight to safety: OK, but that unwinds when the fear dies down.

findarticles.com/p/art...;col1

On Jan 29 05:10 PM Roger Knights wrote:

> It's been argued that gold is an anticipatory inflation play, looking
> a year or two ahead. It’s untethered to economy-dependent factors,
> unlike commodities with mundane tility. And it's a flight-to-safety
> play, when currencies and banks and national economies and equities
> and bonds are wobbly or worse, as they all are now. It won't take
> many people thinking that way, even just a little, to move gold a
> lot. It's starting to happen--gold's back up to 906 this afternoon,
> resuming its strong move upward.

Jan 30 04:15 PM

[Stone Fox C...:]

sure seems like everyybody expects gold to rise, but why hasn't it. Seems like a lot of people expected gold at 1500 already and its barely budged. Logically I like the trade idea, but it sure seems like a crowded idea.

Jan 30 06:43 PM

[Mayascribe:]

I've read way over a hundred posts about gold in the last three months, yet no one writes this:

On Nov. 20, 2008 Barrack Gold was $21.20; today, $39.40.

On Nov. 19, 2008 Newmont Gold was $24.70; now, $39.87.

On Nov. 19, 2008 Yamana Gold was $3.73; today $8.06.

On Nov. 19, 2008 Jaguar Mining was $2.10; now $5.84.

On Nov. 24, 2008 Nova Gold was $1.87; today, $3.50.

I happen to like stocks that nearly double, or more than double, in just two and a half months. Don't you?

And, if you think you can't buy because it's too late, Nova Gold has nearly doubled since January 21st!

Is there any argument about what gold is doing, or where it's going?

Jan 30 07:29 PM

[Glenn McSpa...:]

good stuff mebane. the GLD Jan10 100 Call is up 21% this week.....

Jan 30 08:26 PM

[El español:]

Here in Spain we are in troubles.

In May all the world will be in troubles too (only for go worst).

Futures, Shares, ETFs will be ok for a while.

But finally only the physical gold will help to you.

Jan 31 01:40 PM

[chistletoe:]

The total amount of gold that's ever been mined or collected on this planet
would only cover a football field about one yard deep. In order
to work as the world's currency, given the recent velocity of money,
gold would have to have a price in dollars of at least $10,000/oz.

In other words, there isn't enough to go around.
As other thoughtful commentators have pointed out, its the only game left in town. No one has any storage space left for any more oil.
Industrial metals have no trading value in a collapsing world economy.
and people are finally beginning to realize that the US dollar,
backed by mountains of debt which will never be repaid,
is losing what little trust it still has, very very fast.

Jan 30 07:57 AM