Gold Is Losing Its Luster

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 political whim of the powerful few.

Disclosure: Long OIL, DBA.

Comments

[morph366:]

I don't mean to be pedantic but there is a shift in your logic when you say -
"Anyone buying gold at current levels is essentially speculating.... and they you say ..."it is a gamble".
Buying gold or for that matter anything can be speculative but that doesn't mean that you are gambling. Although it may appear like we live in a casino economy there are more people that win by speculating in assets than will ever win at the tables in Las Vegas.

Feb 13 07:31 AM

[Cesato:]

It all depends on your investment profile or trading profile. If you trade Gold and expect to make money from scalping the volatility you would certainly be in the wrong side of the gamble. If you buy Gold with a long term view then you would have bought it at much lower levels. When authors talk about Gold and inflation then the chicken/egg question pops up, in my view, Gold is bought with the expectation that inflation in the future is going to be higher, it's not that when inflation is already high then investor buy Gold. Anyway to be fair with your analysis I would think of Gold going lower if the price consistnetly drops below USD 910, otherwise the trend is your friend.

Feb 13 07:50 AM

[theGhoad:]

Yes ...but ...no. I value your points but gold will always have its market until replaced by a better physical asset. Gold has worked its way for thousands of years ans still has a fortified place in our economy. One day, I understand it may change, but not this decade.

Feb 13 07:56 AM

[LanceLink:]

No need to sell. You could have hedged, using the GLD. Not income producing? How about selling calls, at 2-3% per month? How about buying puts, or, better yet, a put spread?

I hold the GLD not because I think it's going to 200, but because it will hold up better relative to other asset classes. And with options, I can make money along the way.

Feb 13 08:44 AM

[5142152-337:]

You are to be congratulated! You did good, made a profit, and thats what it is all about. That said, I would hope you buy some physical gold and/or silver. You NEED to have some precious metals to offset your stocks/bonds. Stocks/bonds now are a gamble--not precious metals. Good hunting! See, this bug didn't bite you!!!

Feb 13 08:58 AM

[AuGod!:]

I bought physical at around 650 settlement price and sold at 930. I also had upside on the currency because my currency and US was at parity at time of purchase. Will buy more physical on the dips as it is my strategy to accumulate more than trade. But still, if this isn't a profit generator then I guess I am an idiot. I will look for gold to retest 750 in the off-season and climb when the boys are back in town. It could climb higher in the interim but I listen to that sage who said about tops and bottoms, - take the 60 in the middle and leave the 20 on either end. You'll sleep better.

Feb 13 11:53 AM

[agneaux:]

I, too, have a lot invested in GLD but I worry that they are not literally holding physical gold but some type of gold paper futures or something. At the rate they are supposedly adding gold, there can be no supplier able to give them that much! Another Ponzi scheme?

Feb 13 06:09 PM

[thesnowjob:]

Can I summarize your article?

You held GLD, therefore you were a bull.

You sold GLD, therefore you are now a bear.

The meat is that the rest of us that like gold are now gambling or speculating, but your investment in USO is not???

Feb 13 07:38 PM

[Sakata:]

Quote:
"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. "

I posted this recently in another thread but it bears repeating. Gold is money, the dollar is a share in the US Economy. You say you want to leave some money on the table but you are trading your existing money (gold) for these very risky shares in a failing "company" (dollars). An ounce of gold will always buy the same amount, regardless of how many shares in the US Economy it will buy. But those share almost certainly will lose a lot of their value very quickly. If I were you I would hang on to the money you already have. At some point in the distant future the US Economy might improve and then you can consider repurchasing some shares in it.

Feb 13 09:44 PM

[omooc:]

I don't suppose GLD moved only up during the 4-year period. If this is not so, proper timing could improve your results many times, I presume.

Feb 13 09:52 PM

[tickhound:]

You seem to suggest that most Americans are crazed in mass by this gold bug. Like its another housing boom already. I believe you are a victim of your own immediate environment. The truth is still only a small percentage of Americans hold any kind of gold investment. Sheeple, in mass, have no idea why anyone would buy gold. Most have no idea their currency is in trouble. Most won't even notice they are in trouble until their credit card rates soar. Many believe we are at a bottom and its simply a matter of time before we return to "life the way it was." They are continuing to try and borrow, and seemingly take advantage of nice interest rates. Gold continues to move up while most Americans, if doing anything gold related, are SELLING their gold... Thinking dollars are money and gold is simply jewelry. You have become victim to your own contrarian views... So surprised that SOME people are finally agreeing with the gold bugs that your former views on gold can no longer be valid... And that gold must no longer be the play. Sad but true for you. I, on the other hand, realize that the masses will soon realize its importance. It won't be a boom, it will be a simply be a move towards its actual fair value. And this value is only now being realized by the sheep, including the media. They will wish they had held onto that gold jewelry. I'm glad you turned a nice profit. But before you suffer paralysis by analysis of your mistake, get back in the market.

Feb 14 02:53 AM

[turtle1663:]

Gold has been in a nice trend. Some big money has been made.

Of course as any good trend follower knows, if a trend arrives you ride it. Unfortunately, the Wall Street press must attempt to explain 'why' a move has happened or offer some type of prediction for the future. For example, these excerpts from the Bloomberg article Gold May Extend Longest Rally This Year on Inflation Concerns are plain confusing when it comes to actually using any of the advice to make money:

- 'We're going to see elevated inflation trends over the short term. A lot of the hedge funds are selling crude oil and getting into gold.'

- 'Bloomberg's survey has correctly forecast gold's direction in 43 of 76 weeks, or 57 percent of the time.'

- 'Gold will continue to march higher over the next several weeks, if not months.'

- 'U.S. consumers are beginning to see $60 oil and $3 gasoline drive up prices across the board, and this will eat into their disposable income. As the picture gets gloomier for the U.S. economy, this will fuel the demand for gold as a neutral currency and hedge against inflation.'

- 'I won't buy at these levels. If the market dips down to $468, $465, I will buy.'

Put it this way, if a bunch of hedge funds are selling crude oil and buying gold, what do you do EXACTLY? And if a forecast of direction is right 57% of the time, what are we talking about exactly? How far or long does the 'direction' have to advance to be part of the so-called accurate forecast? Then we have the comment by the guy not buying at 'this' price level. Does that mean buying 'dips' is wise? Can you define for me the term 'dip' in mathematical terms?

These kinds of articles from Bloomberg, Yahoo, etc. appear every day. They are useless. A healthy dose of critical thinking applied over 5 minutes raises even more red flags than my few concerns. Isn't there another way to approach it? Yes.

Do you read these excerpts and immediately jump up knowing when to buy or sell exactly? Do you hear these comments and know how much to buy or sell short given your risk tolerance and capital on hand? Do you have expectations that those shouting to buy gold will come knocking on your door when its time to sell?

These fundamental blather articles might make those quoted sound smart and knowledgeable, but there is simply no precision when it comes to the big questions. How much? When do I exit? How do I know when to exit with a loss or gain?

An even better question: how can we know the top? A great trend follower, tackles that very issue in his September 2005 commentary:

'The same problem exists with the exit point on the trade. Because MT does not try and find the market tops, there will always be some give back or price concession from the maximum. Note that if we tried to get out before the maximum, there will still be a trading cost. It would be the opportunity cost of not participating in the trade as it moves to the maximum. We view that this cost is higher than the cost of exiting after the high. The reason is simple. We cannot tell when or where the maximum price will occur.'

Do you see how more pragmatic and reasonable that sounds as compared to the analysts and gurus?

But even if you can wrap your arms around sound decision-making in an uncertain world, most people can't escape the constant drumbeat. Consider this excerpt from the USA Today in early October:

'Two devastating hurricanes. Slow government response. Sixteen-hour, 200-mile traffic jams of fleeing residents. Levees breached. Levees breached - again. Tens of thousands displaced. Mold everywhere. Elderly patients drowning in nursing homes. But that's not all. A sideways stock market. Rising interest rates. A barrel of oil at $67. Gas over $3 a gallon. Consumer confidence down. It's no wonder American investors are feeling vulnerable.'

Wow. If I listened hard to this kind of stuff, I should just quit. The game sounds like it is over. Of course, a good many people read this and did nothing except retreat in fear.

Great traders, however, relish uncertainty. They know that the unpredictable is where the big bucks are located. They harness their fears. The great ones don't read the doom and gloom in the USA Today. The great traders were prepared for the gold move long before it started. They had a plan ready before the trend ever hit the radar screen.

You always have a choice: enter a market like gold with a plan or listen to the fundamental prophets who talk about buying on 'dips'

Feb 15 05:35 AM

[Roger Knights:]

"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."

Yes it is--the past year's action has formed the handle on a monstrous 30-year "cup" that projects a price-doubling from this point. The "blastoff" phase after the pullback has now begun, with gold rising to 960 just before the open in NYC this morning (Tuesday the 17th).

Feb 17 06:41 AM