12 Reasons to Short Gold 114 comments
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By Louis Basesense
If you’re a self-professed “Goldbug,” feel free to read no further. Or at least spare me your hate mail. Because no matter what I say today, I know you’ll cry foul… or something much more colorful.
But for those of you with an open mind - especially after my last three contrarian predictions proved dead accurate - read on.
Because it’s time to start shorting gold!
You won’t find many, if anyone else, making this case. But as the first reason of 12 below reveals, that’s precisely why you should give it more credence.
12 Reasons To Start Shorting Gold
- It’s decidedly contrarian. If a contrarian investor is someone who deliberately decides to go against the prevailing wisdom of other investors, shorting gold certainly fits the bill. Right now, everyone else is buying gold, or at least recommending it. If you have any doubt we’ve reached such fever pitch levels, consider No. 2.
- The infomercial factor. The best indicator of a turning point for any investment, in my experience, is infomercials. If an investment gets so popular it invades the pre-dawn hours with non-stop but-wait-there’s-more offers, it’s time to get out. And that’s exactly what’s happening now. So much so companies like Cash4Gold.com are invading primetime television. They even splurged for a Super Bowl ad spot. And they recruited washed-up celebrities Ed McMahon and M.C. Hammer to boot. In case you forgot, the Hammer filed bankruptcy in 1996. And Eddie boy almost lost his 7,000 square-foot, $6.5 million Beverly Hills pad to foreclosure. No offense, if you take investment cues from these two, you deserve to lose money.
- There is always some truth in a rumor. Recent news reports suggested Germany, the world’s second-largest holder of gold, was selling some from its vaults to trim its deficit. It turned out to be a rumor. But you gotta wonder if there’s some truth behind it. After all, high gold prices would be an easy way to raise cash. In other words, the scenario is completely plausible. And if Germany’s considering it, even remotely, so, too, are plenty of other deficit-ridden governments. It goes without saying that a government dumping supply on the market will send prices lower, quickly.
- The gold-to-oil ratio is out of whack. Historically, an ounce of gold will buy you about 14 barrels of oil. But with oil around $40 per barrel, an ounce of gold gets you almost 23 barrels - a whopping 64% above the historical mean. If you believe in statistics, a reversion to the mean is imminent!
- So is the gold-to-silver ratio. Historically, an ounce of gold will buy you 31 ounces of silver. But now the ratio stands at 73 - an unbelievable 134% above the historical mean. Here, too, a reversion to the mean is imminent. And I’d rather place my bets on a 57% decrease in the price of gold, than silver more than doubling to make it happen.
- The HGNSI index is too high at 60.9%. For the past 25 years, Hulbert Financial Digest has tracked the average recommended gold market exposure among a subset of gold-timing newsletters. It usually fleshes out around 32.6%. But now it rests at 60.9%, a level it’s only exceeded 13% of the time. The key - Hulbert found an inverse correlation exists between his proprietary index and the short-term market direction of gold. In other words, if the index is high, like now, gold is headed lower.
- Trinkets drive demand, not governments or speculators. Nearly 75% of gold demand comes from the jewelry market. And if Indian brides balk at buying above $750 per ounce as the Bombay Bullion Association reports - India’s gold imports cratered 81% in December - look out below. And don’t be fooled into thinking investors (governments or speculators) will pick up the slack. As HSBC reports, rising demand from investors, particularly from ETFs, only offset half of the 33% decline in jewelry market demand since 2001.
- What makes now “different?” If the global economic crisis keeps getting worse, as goldbugs like to point out, why hasn’t gold tested last March’s high of $1,030.80 per ounce? Or blown right by it? After all, gold is supposed to increase in value as economic conditions worsen. But it hasn’t lived up to expectations, not one bit. And I don’t think it ever will. Ultimately, when you factor in the massive amounts of stimulus being injected into the markets, on a global level, we’re close to the worst of times… and the peak for gold.
- Analysts love it. According to Bloomberg, 16 of 24 analysts surveyed by the London Bullion Market Association believe gold will reach a minimum of $1,032 per ounce this year. As we all know, analysts’ track records are deplorable. Instead of just ignoring them, why not bet against them? The odds are definitely in our favor.
- Hedge fund buying dried up. Institutional speculators (hedge funds) played a large part in gold’s run-up. But 920 of them went Kaplooey last year, according to Hedge Fund Research, Inc. Not to mention, hundreds of others hemorrhaged capital as investors demanded their money back, while those left standing ratcheted down borrowing to close to nothing, according to Rasini & C., a London-based investment adviser. In the end, gold prices will eventually reflect the absence of these former heavyweights.
- Gold is schizophrenic and the wrong personality is in control. Multiple motivations exist to buy gold including the desire for a safe haven, currency, adornment, raw material, or inflation hedge. But much like Treasuries, the bulk of buyers come from the safe haven camp today. And once the economy shows any signs of perking up, we can expect these same investors to flee for more risky assets. And don’t be so quick to rule out a second half recovery…
- The Fed, the President, history and the Baltic Dry Index concur - the economy’s on the mend. Despite dismal data, both the Fed and President Obama point to the current recession ending by the second half of 2009. Moreover, the average recession only lasts 14.4 months. So even if this one is longer than usual, we’re still near the tail end of it - a fact underscored by the recent 61.4% rally in the Baltic Dry Index from its early December low. As I wrote in November 2008, the index is the first pure indicator of an uptick in global activity. And once the economy gets back into gear, the Fed will act quickly to rein in the money supply and curb inflation.
Clearly the gold rush is on. But that’s all the more reason to move in the opposite direction, against the herd. I realize this might be the most unpopular recommendation right now, but that means it could also be the most profitable.
And before you brand me a fool for recommending shorting Treasuries and gold in the span of two months, here’s the intersection. The driving force behind both assets in recent months has been safe haven buying. And it will remain the dominant variable in determining price in the months ahead. So when investors go back on the attack for more risky assets, prices for both assets will fall.
It’s already happening for Treasuries. And I’m convinced gold is next.
Investment U Editor’s Note: In the past year, Lou’s been dead on with his predictions. He called the U.S. dollar bottom versus the euro within 26 days… oil’s peak within 24 days… and the top in U.S. Treasuries within two days. So when he makes a big call like this, we listen.
Today’s Investment U Crib Sheet
We recommend holding 5% of your portfolio in precious metals as part of our Asset Allocation strategy. Asset allocation refers to spreading your investments among different asset classes, not just different securities or market sectors. Doing this has allowed us to survive, prosper and build our wealth during the longest bear market since The Great Depression.
We’ve had money invested over the last five years in foreign stocks. While the stock market has gone down, these have gone up. We’ve also had money invested in six other asset classes. And over that five-year time period we’ve beaten the S&P’s return.
Now there are a couple of ways to limit your losses and lock in profits. If you’re heavily invested in gold you should definitely be using trailing stops. And if you are, you might want to consider lowering your stop percentage.
The other thing you should be thinking about is the balance of your portfolio’s allocation. If you’ve experienced gains in gold, or any other asset class, you should look at portfolio rebalancing. It’s a simple approach to guarantee you’re selling high and buying low. Lou explains more on how to put “Rebalancing in Action.”
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While the cash4gold infomercial is ridiculous, it is advising people to SELL gold, not buy it. So the infomercial offers the same advice as this article. Has the author seen the commercial?
reverse them
Oil to gold is out of whack?
Silver to gold is out of whack?
It can go either way, depending on what your website is trying to sell.
Anyhow, the USA is out of whack, the World is out of whack, US Congress is out of whack and worse.
So, pick your whack and live with it.
Can you cite the source for this information? My comp warns me of mal-ware when attempting to view the BBA site.
Otherwise, very good article, with some excellent investor-common-sense thrown in to boot. Personally, I think oil will rise to even out that particular point.
But I don't agree with another half of reasons. We are not in average recession, we are in Great Depression 2.0. If you scrap all the fluff, that's what TIme Geithner said yesterday. There is no hope for ecomonic recovery in the second half of this year. Recovery in 2010 is possible, but in doubt.
I agree that gold is overpriced. But I wouldn't short it right now.
By the way, Treasuries are not overpriced. They correctly reflect current level of deflation and risk.
I am an investor in gold... (not expert) i just bet on it. Till now i have lost approx $ 360,000 USD. I have been out of this stuff for a 6 / 7 months and re started to do the same procedure from Jan 20 2009. Again i have lost approx $ 3,000 USD in this time period.
Over all i gain $ 500 USD and lose $ 1,500, :)
Do you think i should bet again as on your this statement ?
Guide me further,
Thanx :)
As the article says, India’s gold imports have cratered - and they were previously the world's biggest buyer, accounting for 25% of global demand.
Just one question: would you recommend an ETF that shorts the comex bullion or the gold mining stocks?
1. Stupid. Being contrarian is useless unless you have a specific, good reason for it.
2. Basing investment decisions on infomercials? Really?
3. There is not always some truth to a rumor. Maybe governments or other investors will sell gold to pay debts, it's a valid concern. But, that seems a bit unlikely unless gold first goes to double or triple what it's currently worth.
4. The gold/oil ratio is out of whack because there is an oversupply of oil to current demand and an undersupply of gold. Gold is not being produced any faster, yet oil production is drastically being cut, which points to oil increasing in price rather than gold decreasing.
5. Yes, there will probably be a correction in the gold-to-silver ratio, but who knows when and where? Again, where are the fundamentals? That is correlation, not causation.
6. You're using a reference point that only goes back 25 years? When was the last time in the past 25 years that the Fed printed/treasury borrowed 3 trillion dollars in the course of a few months?
7. That's simply not true. Various things drive demand. Yes, jewelry demand is down. But demand is demand, and safe-haven demand won't go away until the markets and dollar stabilize. Which you seem to think is just around the corner. Seems many disagree.
8. What makes now different? Are you kidding?
9. Again, not a real, fundamental reason. I sell things based on the idea that they're likely to go down, not that people like them.
10. That's why gold fell, it doesn't explain its subsequent rise.
11. I am a buyer partly to protect against inflation. I don't think you actually know any reason why people buy gold, you're simply guessing.
12. Wait, so you should be contrarian against analysts, but not a man who has zero financial background, the president? Who keeps repeating what a long slog this is going to be? And you want us to base all our investment decisions on a blip in short-term raw materials shipping? What are you smoking?
Gold is useful as part of your portfolio (5-20%) as a hedge against inflation.
You tell me what's a better investment than that.I want to know what country won't collapse, or raise interest rates, or borrow, or print more money. I'll buy their bonds.
Pawn shpos are doing well also.
On Feb 11 02:33 PM User 355231 wrote:
> Good article with a small flaw:
>
> While the cash4gold infomercial is ridiculous, it is advising people
> to SELL gold, not buy it. So the infomercial offers the same advice
> as this article. Has the author seen the commercial?
Just buy oil and short gold. If we enter a highly inflationary environment (I highly doubt this), oil will rise more than gold since it fell so much.
If we enter a deflationary environment (much more likely), gold has much more room to crash than oil.
In the long run, the author will be proven correct. Gold will eventually drop from its highs as the world economy starts chugging again. But while the author predicts a light ride and a quick turnaround with gold retreating from current prices, I predict a long depression of at least 5 years with gold reaching $5000 per ounce before retreating from that high.
It will take years for this economy to unwind and then, finally, start to recover on a new base. Earnings will be dismal for many quarters and the banks will continue to lose unbelievable amounts of money. The Commercial Real Estate Market will fall apart later this year as will consumer debt. Derivatives will turn billion dollar losses into trillion dollar losses. The government will continue to stimulate to no avail. Federal debt will skyrocket, as will interest rates. The dollar will decline and inflation will roar.
But gold will hold its value through it all.
2. Gold and miners have broken out technically
3. Info-mercials is just the beginning of they hype. Remember, you want to find something people will build castles in the air out of (think tech stocks, real estate, etc)....we have yet to begin a disconnect from true fundamental value for us to call the price a bubble....this will happen but not yet....
Right...just like they reined in the money supply earlier this decade to 'rein' in the housing bubble.
I am not a gold bug....but thats one flaw.