Sorry Gold Bugs, It's Time to Sell

At the great risk of alienating all of the gold bugs out there, I hereby solemnly declare that on February 11, 2009, I sold my entire StreetTracks Gold Trust ETF (GLD) position at $92.87 / share. I bet on gold outperforming by buying into the GLD ETF on 12/30/2004 at $43.80 / share. Now, a little more than 4 years later, I got out with a 112% profit (not accounting for commissions).

Certainly arguments can be made for owning gold - the only non-fiat currency, as a hedge against inflation, for diversification and wealth preservation. Such arguments work best in an inflationary environment. However, when the economy shrinks as it is bound to do for the foreseeable future, despite huge cash injections by the Government, the case for gold becomes a much weaker one.

Many gold lovers will no doubt chime in saying that this is just the beginning, that gold has much more appreciating to do and that the top is nowhere in sight. While this viewpoint may have some merit, I would like to point out that for 20 years prior to 2004 gold prices went nowhere. So, merely wishing it higher doesn't seem to work.

Technically, gold is now trading marginally lower than at the peak, which it reached almost a year ago. In fact, looking at the GLD chart, you will notice that over the past year it has made several lower lows and lower highs - hardly a bullish signal.

Fundamentally, volleying against gold are several important factors:

1. Gold is not an income producing asset like bonds and dividend paying stocks.
2. Falling prices and increasing inventories of copper, aluminum, nickel, zinc and most other industrial use metals.
3. Shrinking economy and contracting asset values for virtually everything, including real estate.
4. High price of gold relative to oil and agricultural commodities. (See Spend your Gold on Wheat and Oil and Ag Commodities on sale.)

Anyone buying gold at current levels is essentially speculating - either betting that people will rush to gold as stock and bond markets deteriorate further (creating a speculative bubble) or betting on inflation picking up sooner or faster than markets are currently anticipating (betting against the market). In either case it is a gamble - not something I like to do with my money.

While short term aberrations and extreme volatility can create great opportunities, longer term valuations tend to revert to their mean and often much faster than most people expect. Thus, I prefer to leave some money on the table and walk away, rather than gamble away profits trying to pick the always illusive top. This is especially true when markets trade based on speeches by government officials and their future direction is entirely dependent on the political whims of the powerful few.

Disclosure: long DBA, OIL

Comments

[ROLEX18:]

I am short since 900$ and will cover only at new high of 1050$, funny only it will never reach there, hammer is ready at 950$, very big hammer to smash the bug.
I like to smash bugs. *(:)*

Feb 12 11:58 AM

[Dana H.:]

Holding gold now is only a "gamble" if you put most of your wealth into it. Otherwise it is a hedge -- a hedge against the price inflation likely to arise from the government running the money printing presses non-stop.

Feb 12 11:58 AM

[oldman:]

if you own GLD why not just sell calls and/or buy puts?

Feb 12 12:02 PM

[mr freddo:]

The author makes several interesting points about gold. Yes, in the long run, gold must revert to the mean. But over the next several years of this depression, gold will shine. It is one of the only assets that held its value in 2008. Granted, this deflationary environment will put downward pressure on all asset classes, but once inflation kicks in, and it will if there is ever a recovery, gold will be a safe haven.

Like Dana H., I am using gold as a hedge, an insurance policy. Investors might also look at silver, (SLV) which historically, is cheap as compared to gold.

Feb 12 12:15 PM

[silverwood:]

I give the author kudos on taking a nice profit in GLD. Also being long oil and Ag commodities is another statergy I can agree with.....
Disclosure: long DBA, OIL
One thing the author doesn't touch on is holding physical gold coins as a long term store of wealth, which in my opinion should be included in ones overall porfolio.

Feb 12 12:38 PM

[Kelly Liebe...:]

Maybe you should have held on for a little bit longer...I always find it curious when an investor who invests in the same things that I do, then uses derogatory terminology to define anyone anyone not selling when they are...Funny, they don't give out derogatory terms for people trading oil.

Feb 12 12:48 PM

[lance sjogren:]

ROLEX18:

Manipulate precious metals all you want on the short term, I guarantee that over the long term you and the other naked emperors cannot reverse the laws of economics.

Feb 12 12:49 PM

[lance sjogren:]

The one thing that WOULD concern me is a rapid runup in gold.

Gold has been remarkably stable. A runup would indicate a lot of momentum goons were getting into gold and driving it up, and that upward spike would certainly reverse.

In the long run, that will all be just noise, however. Gold will follow montetary inflation, and thus I would expect the general trend in gold, if you ignore the spikes, will be a trajectory that will take it to about $2000 per ounce within about 4 years, as the US dollar will have been devalued by about 50% over that time span.

Feb 12 12:52 PM

[lance sjogren:]

Interestingly, like the author, I also have some DBA.

Been wondering about the oil ETF's as well, like OIL. However, my understanding is that those are in futures with substantial time horizons, and thus are invested in oil at higher than today's prices.

If there were an oil ETF that were very closely pegged to the spot price, I would love to put some money in that.

But my impression is that the oil ETFs are actually not very good ways to invest in oil prices.

Feb 12 12:56 PM

[longoil:]

My preferred way to play oil is via MLPs and Canroys.

1) Good MLPs like HGT and SJT and Canroys like COSWF, ERF and PWE are paying excellent dividends (5% to 20%) despite $40 oil. As Jake mentioned in point #1, gold does not pay dividends, but MLPs and Canroys do.

2) After oil prices recover in a few years from now, when the economy is taken off life support, MLP and Canroys will also enjoy a nice capital gains to boot.

Feb 12 01:12 PM

[Whippet:]

I'm bullish on gold (own bullion + options on GLD, plus GDX), and at the same time agree with some of the author's sentiments. Gold will definitely appreciate against the dollar over the next several years; the question is whether other assets will perform better. Most pertinent ratios (gold/oil, gold/silver, gold/ag commodities, gold/PGMs) are at or near long-run highs. I except the gold/S&P500 ratio as this one implies that markets may still be overpriced for the long run. Seems to me the opportunity cost on gold is a bit high right now, and that base metals, silver, oil, and food are safer bets for what is sure to be an inflationary environment in as soon as 6-12 months, lasting several years (if we take history as our guide). To bet gold will continue to outperform other commodities is risky, but to short it is insane.

Feb 12 01:17 PM

[doubleguns:]

Gold is presently a storage of wealth first but quickly becoming a hedge against a collapsing dollar. We are going to try and sell 2 trillion of treasuries this year or print that money to pay our way out of this semi-depression to keep it from becoming an outright depression.

You really NEED something to protect you if the dollar collaps happens and oil could do well too so I guess your covered with long oil. I like silver and gold since I have no room for the 55 gal oil cans in my house or garrage. It is also a real hassle dragging them to the store to buy milk, etc....

I will keep my 10% gold and silver for now. I suggest you consider having some ON HAND too.

Feb 12 01:18 PM

[BillyBobCash:]

What a hedge for me this gold (GLD) is - Actually I'm into junk bonds as well and I'm not getting crushed - most of the money in my account is tied into cash since last summer when I saw the "bad moon a risin'". Our greedy financial business executives and "where's did my tax revenues go" politicians will make us pay for their mistakes for quite a while. Gold will flourish.

Feb 12 01:21 PM

[Cesato:]

It is certainly wise to have and exit strategy in this environment, your argument makes sense, the only point is that stars are already aligned and momemtum accounts will make the spike high happen to then reverse medium term, but not just yet give it 1 or 2 months, I believe.

Feb 12 01:21 PM

[User 347881:]

So - where *do* you put your money instead?
I appreciate your article, but it does not make full sense without this question being answered.
Sincerely,
Mat

Feb 12 01:37 PM

[roy piper:]

Zzzzzzzzzzzzzzzzzz. I am not a trader. Given the massive stimulus/bailout it is inevitable that sooner or later the dollar will drop due to the glut. This will raise gold even without inflation.

Feb 12 01:45 PM

[old guy:]

Gold is my hedge right now and with a great deal of inflation right around the corner (and that is a sure thing) it will go higher. Who is going to pay the taxes a year or so from now...Baby Boomers retiring,no capital gains taxes,no dividend taxes,layoffs equal no taxes,lower incomes less taxes...looks like a good time to hold GOLD!

Feb 12 02:02 PM

[keo:]

I agree that gold looks high right now compared to other commodities...
So may be it will dip on the short to medium term. Nothing to worry about in my view... What I do worry about is counterparty risk when buying ETFs or ETNs for commodities (so good for you that you sold your "gold"), and about central bankers printing currencies Zimbabwe style. I don't see many good alternatives to physical gold.

Feb 12 02:41 PM

[Jake Berzon:]

Folks, don't get me wrong! I am absolutely convinced that WHEN inflation catches up, GLD will shine once again, but in the (potentially very long) meantime it is extremely expensive relative to other commodities that you can own.

You must also keep in mind that very long term gold can only preserve your purchasing power, but it can not make you money - it doesn't have earnings and it pays no interest or dividends!

So, what do you do instead? I have to admit that I don't have a very good answer to this question. What I am attempting to do is to reposition my portfolio over time to use other commodities as a long term store of wealth and also occasionally jumping in and out of very specific stocks that I see as amazingly underpriced at the time of purchase.

Does what I am doing work? To some extent, as my portfolio considerably outperformed the S&P 500 since I started to track it on a daily basis in December 2007. On the other hand, OIL ETF has been a major disappointment. As lance sjogren and others aptly pointed out, OIL and USO invest in oil futures and do not always track spot prices very well. When I purchased OIL in December I did not expect this discrepancy to be so huge - while the spot prices hardly moved, OIL is down more than 25%. So, if any of you have better ideas - I am all ears!

P.S. Physical gold coins is a completely different issue. (This goes along with the theme of moving away from major cities and storing up food and ammunition.) I am not sure that you will need it or that it will help, but just in case, if you can afford it, why not?

Feb 12 02:53 PM

[tb1975:]

so far you are the one being smashed in that trade, Rolex


On Feb 12 11:58 AM ROLEX18 wrote:

> I am short since 900$ and will cover only at new high of 1050$, funny
> only it will never reach there, hammer is ready at 950$, very big
> hammer to smash the bug.
> I like to smash bugs. *(:)*

Feb 12 04:28 PM

[tb1975:]

if only the author could have held on 2 more years- 112% would have become 300% to 400%.

Although 112% isn't bad, I just can't see what factors would take gold down for an extended period of time given this impending inflationary climate and the severe recession currently. There might be corrections, but the gold bull has 3 to 5 more years to rage at least.

Feb 12 04:32 PM

[phdinsuntan...:]

good timing, I guess IMF and central banks will
do something to stop the gold bubble, the cant
be so blind (can they?). The point is when the
deleverage ends , looks like we are not just there,
so currency games in the meantime...

Feb 12 04:37 PM

[doubleguns:]

Jake, Your argument that gold does not make you money is the same for all commodities. They preserve your wealth only. Usually they can make you money if they go up faster than inflation because everyone wants it now and wont wait till later to buy it. So in that NOW period you make money, sometimes quite a lot.

Another point the other commodities will rot away over the long term, not gold. Oil might stay around but again its hard to carry around and spend it..

Feb 12 05:26 PM

[GMiki1:]

Jake, Jake, you crazy galoot. How you gonna fight inflation, now? Well, maybe money in a double up oil ETF. Hurry. There *will* be a day after the day after tomorrow.

Feb 12 06:31 PM

[JudeJin:]

i find 99% of people don't know what the upside potential of gold is as the most contrarian indicator i can get.

Feb 12 08:28 PM

[Mr. Ed, Jr.:]

At this time, buying gold is, indeed, a hedge. Just in case the worst happens. But people are also a little scared, and the author seems to have overlooked that aspect. Emotion-driven markets are not rational. Very risky to bet against gold right now.

Feb 12 10:29 PM

[The Too Sma...:]

Aren't we all gambling here? There are always a few people that are so smart that they don't think they are gambling.

Buy at new high. Half of the gold mining stocks are at new high. It should take off as soon as the next down leg of the stock market begin.

Is the market going to go up instead of going down? It tricked us twice this month. I now think it is more like the Damage Protection Team at work as soon as stock market crash to the trend lines.

I have oil as of two days ago. I can risk it when oil hit new low. I guess oil and commodities are not ready to head up until the bottom of the stock market is reached.

Feb 13 12:08 AM

[The Too Sma...:]

One more comment: If gold does not take off when the stock market begin the next down leg, get out of your gold investment immediately because we may be facing another round of deleveraging/deflation indiscriminate selling.

Feb 13 12:15 AM

[Gone Broke:]

Why didn't this genius sell before when gold was over $1000???

Feb 13 08:55 AM

[know nothing:]

You can't wish the market higher? What have all you stock market guru's been doing? Obama rally, just pass a stimulus package, wish, wish, wish.
How about lower highs and lower lows? Stock market? I don't see many higher highs and higher lows? Your article was a comic book article. A JOKE

WAKE UP!

Feb 13 09:26 AM

[CoinMiner:]

Jake,

Interesting analysis. Your first point is that GLD does not pay interest/dividend. That is correct. However, that was also correct on 12.30.04, when you bought the position. You have not provided income production as a reason for your purchase. I checked your blog and website and could not find the reasons for your buy on that day since I could only find your calls going back to May 2007.

If your primary fundamental reason for selling is as true as when you bought, why sell now when GLD displays MUCH stronger technical’s than, for example, last February, or much weaker technical’s – such as last August? Just THIS week GLD broke out of a two year trading band, to the UPSIDE, on VOLUME.

Reasons 2 and 3 I agree are fundamentally against GLD, but these are fundamentally against all other commodities to, including oil.

Hence reason 4 withstands scrutiny the strongest. I would place short term money on your longs (e.g. OIL) also, they seem sound bets. However, you are selling a 4-year long position in the money for a short term trade. It will likely take several months (and a few very obvious test of the 50 DMA to the upside) for OIL to create a bullish technical position – fundamentals aside. In other words, you are trading a sound position (GLD trading over 50 and 200 DMA – though short term overbought) for a speculative one (OIL waaay below strong resistance). You are not replacing your sound money position with another sound position, only a more speculative one.

In sum I disagree with your tactics more so than your strategy.

(Disclosure: I remain long physical gold and silver since February 2000 and will sell into IV of Primary THREE of THREE. GLD provides a nice vehicle for short term trading only.)

Happy Trading.

Feb 13 12:49 PM

[MGA_1:]

Kudos for the profits on GLD ! I'm holding and in for the long term. But where do you want to put you money:
* stocks - Sure there will be deals, but I can't think of any industry or company that I feel confident in right now.
* T Bills - Last refuge of safety, but 30 at 3.6% is this a safe place for money?
* real estate - low interest rates but it's on the way down and has a ways to continue
* Cash - yes deflation right now, but the fed is printing a heck of a lot of money...
* Other commodities - At lows right now, but with the world economy deflating, I think industrial commodities are going to be hit along with that.

Gold for me....

Feb 13 01:57 PM

[REBEL:]

ANY investor who criticizes another for selling an investment for a 20+% annualized gain, ( for an extended time span), is way off-base. Yes we are in for severe inflation, (M3 up over 75% in 2008). However, four facts deserve consideration: 1) Where does GLD get its gold; 2)Do they have any real gold, (not just paper gold): does the bank holding that gold place the investor's interests higher than the Federal Reserve's interest; and 4)Specially in light of the Federal Reserve's war on gold since 1913 - the year the Federal Reserve was born - what makes you think the Fed won't make owning gold illegal again? It has happened before.

Feb 13 08:09 PM