Protecting Yourself from a Gold ETF Bubble

Are gold ETFs entering a bubble? More and more people seem to think so.

Last week, we noted a story that contained 12 reasons to short gold. Barron’s raises the question, too, now that gold is priced above $1,000 an ounce. The price is equivalent to more than 25 barrels of oil, a ratio that has rarely been exceeded in the last 35 years, says Michael Santoli for Barron’s.

There are two sides to the argument:

• Owning gold seems logical now, given that the turmoil has gone completely global. Gold has also been rising, even as the U.S. dollar is gaining strength, too.
• On the other hand, SPDR Gold Shares (GLD) is now routinely turning over $2 billion worth of trading each day, which might give investors pause. Is it becoming a herd mentality?

Meanwhile, Brett Arends for The Wall Street Journal gives the ins and outs of gold investing, including that gold is volatile and no one knows its true worth. For that reason, the mania is to be taken with a pinch of salt, he says.

While gold can be a volatile metal, right now, the trend is there. You can’t fight it. But if you’re in gold, have an exit strategy at the ready (we get out either 8% off the recent high or when it falls below the 200-day moving average). This will help protect investors from further losses, and may even preserve some gains that might have been made.

Comments

[Conan the B...:]

Tom: what's your opinion?


I have a "Rule of Thumb", that I use on individual holdings:
If I am unwilling to add to my position, than why am I still holding All of my Position?

So, If you have an opinion, I'd like to hear it because I'm not going to hold on for a piddly 30% gain for Physical Gold.

I'd rather go into the Miners.

Feb 24 09:10 AM

[Roger Knights:]

The fact that miners are selling below their traditional ratio to the price of gold, and that there is so little speculative activity in penny-stock gold miners, is an indication that gold is far from reaching the bubble stage. People who think gold is too high do so mainly because of recency bias.

Feb 24 09:33 AM

[sdavid0419:]

If you are so smart why didn't you use the exact same scenario to start the oil stampede again. Wouldn't it make just as much sense that if the gold oil ratio is off its because oil is dirt cheap right now and is the real play? It couldn't possibly be that gold is the correct price and oil is dirt cheap!!!!!

Feb 24 10:15 AM

[GreshamWasR...:]

It has been 37 years since Nixon was forced to sever the link between gold and the dollar. In 1972 Federal debt was $436 billion- Federal spending was $231 billion. Gold was $32. In an era of massive spending, borrowing and "quantitative easing" (just a fancy name for printing money) the value of paper money will continue to decline and probably at a faster pace than we experienced since 1972. 10 years from now (and probably less) it won't matter if you bought gold at $1,000, $900 or lower. The purchase will look like a stroke of genius when priced in dollars, euros, pounds or yen.

Feb 24 10:22 AM

[Mad Hedge F...:]

If you have been regularly reading my letter you should by now have sacks of gold American Eagles stacked up against the walls, your portfolio is brimming with gold mining stocks like Barrick (ABX), Freeport McMoran (FCX), and Rangold Resources (GOLD), and your safety deposit box is groaning from the weight of the gold bars it is holding. The barbaric relic is now up 20% since I recommended it in December, and you are no doubt wondering how to spend your new found fortune. Gold has since become the trade of the first quarter, with the open interest on call options on the Street Tracks Gold Shares ETF (GLD) exploding from 445,000 to 1.1 million in just the past few weeks. Options implied volatilities are suggesting that gold could hit $1,115/ounce by June. Oops, you forgot to buy the yellow metal? Use $50 pullbacks to get long. Investors will continue to pour into the sector, since it is one of the few things the government can’t create more of with a printing press.

Feb 24 10:44 AM

[frank90291:]

It's 7:48 am, LA time and GLD is @ $95.27.......... my "stop" is @ $89.00......... I reentered @ $75.00....... so what's the problem. It's not like I actually worked for this loot (in my IRA)........ Relax, set your stops and take a break........ I'm headed to Starbucks with my latest novel,"The very Rich Hours of Count Von Stauffenberg" to hang out.

Feb 24 10:53 AM

[GMiki1:]

Sorry, but you're not reading the real precious metals analysts who follow the market year after year if you think some guy at the WSJ has the scoop. Not really.

Never mind the oil/gold ratio over the short term. It varies widely.

While it's true that gold may dip for a while and consolidate before shooting up again, it will, inevitably shoot up.

Why did gold drop down today? Because people are distracted by a lot of blather, projections by Bernanke and other administration folks. (And I do think they're trying...and I'd LOVE to see a turnaround.)

You understand nothing about gold or these markets if you think gold is in a bubble. Yes, oil will rise, by the way.

Feb 24 11:16 AM

[Conan the B...:]

Come spring, Oil will definitely be higher. Heck, OPEC meets again on Mar. 15th.

This time around, I think the Non-Opec producers will finally realize their idiocy is not in their best interests. (Selling an exhaustable fuel for elephant food.)

In any case, demand will increase on a seasonal basis, even as Opec cuts. This should release the Coiled Spring that is called Oil pricing.

Feb 24 12:30 PM

[CafeCat:]

I bought DZZ on Monday. Ordinary people around the world have been rat holing Gold for the past few years and psychologically the common man always sells at $1000. They like round numbers. When the ones that didn't sell at $1000 see it back off and start to drop they sell as well saying "I should have sold at $1000. A lot of people need the money to eat-look at China and India. There will be a nice down leg but it will take the elevator-not the stairs. Don't wait for the inflation trade-that is a myth. Trillions of dollars went to "money heaven" and won't be back at most all we are going to do is repace some of those but no more that 30%. The rest is gone-inflation will be dead for at least a year or two.

Feb 24 12:58 PM

[dieuwer:]

Could you please post pictures of long lines of people in front of coin shops, ready to purchase the latest iGold iCoin?

No? I guess than there is no mania...

Feb 24 01:12 PM

[12345:]

"On the other hand, SPDR Gold Shares (GLD) is now routinely turning over $2 billion worth of trading each day, which might give investors pause. Is it becoming a herd mentality?"

AAPL also turns over $2B a day..what's your point?

you're really not giving Gold the respect it deserves. maybe you haven't noticed that the Worlds Economy is currently imploding? Gold has been and remains Money, when Fiat collapses Gold still shines

Feb 24 01:16 PM

[roy piper:]

I can't believe the author called this a mania! Gold is still below its 1981 price after inflation. In addition, he talks about GLD (which is 90% of the gold ETF market,) having....gasp...$2B a day in turnover!! That is just what Microsoft, a single stock, has in a day and yet I don't hear anyone saying that MSFT is in a mania. Gold is less than .00001 of the daily volume of stocks yet the author claims that everyone is into gold. So not true. When gold is on the cover of Time Magazine, then claims of mania will have validity.

Feb 24 01:36 PM

[Mad Hedge F...:]

Gold finally hit a wall just above $1,000, and melted $50. For many traders who got in just above $700 three months ago, it’s time to say thank you very much to Mr. Market and either wait for a substantial pull back, or go on to the next trade. It was taking increasingly larger purchases of physical gold by ETF’s and coins by individuals to push the price up. CME statistics showed the speculators’ position soared to a net long of 215,661 contracts. The SPDR Gold Trust ETF (GLD) bought 5 tonnes of the barbaric relic to 1,029 tonnes in just one day. The turnaround neatly sets up a double top on the long term charts with the high set last year. It may take a couple of more runs, and more bad news, which seems in abundant supply, to get the yellow metal to a true new high.

Feb 24 04:09 PM

[goldenpiggy:]

Smart money took advantage of the dip and went into gold and gold mining stocks yesterday. Few realize that for nearly every gold miner, they make money even if gold is $600.

When gold went above $700, I heard the same bubble talk. Then again as gold broke $800. Same thing as gold broke $900. Now that gold broke $1000, did you expect anything different? I'm just waiting to hear bubble talk again when gold breaks $1100. Gotta love it when new bubble talks come out on down days. Folks, corrections are good. I'd be running scared if gold just pointed straight up with no corrections, because that's a sign of a real bubble.

If you're afraid of this bubble talk, then you've probably been sitting on the sideline since gold started its bull run in the $200's.

People need to lose this "love/hate" attitude towards gold and just go with numbers. Numbers don't lie.

Feb 24 09:00 PM

[wardco:]

They Oh I'm sorry"THEY" have a printing press. GLD would be that diluter. Printing gold is easy! Sell GLD use proceeds to short gold. A sack of gold is very hard. The real thing has a premium. Not liquid...very solid. Please explain those damn logistics again.


On Feb 24 10:44 AM The Mad Hedge Fund Trader wrote:

> If you have been regularly reading my letter you should by now have
> sacks of gold American Eagles stacked up against the walls, your
> portfolio is brimming with gold mining stocks like Barrick (seekingalpha.com/symbo...),
> Freeport McMoran (seekingalpha.com/symbo...), and Rangold
> Resources (seekingalpha.com/symbo...), and your safety
> deposit box is groaning from the weight of the gold bars it is holding.
> The barbaric relic is now up 20% since I recommended it in December,
> and you are no doubt wondering how to spend your new found fortune.
> Gold has since become the trade of the first quarter, with the open
> interest on call options on the Street Tracks Gold Shares ETF (seekingalpha.com/symbo...)
> exploding from 445,000 to 1.1 million in just the past few weeks.
> Options implied volatilities are suggesting that gold could hit $1,115/ounce
> by June. Oops, you forgot to buy the yellow metal? Use $50 pullbacks
> to get long. Investors will continue to pour into the sector, since
> it is one of the few things the government can’t create more of with
> a printing press.

Feb 25 02:55 AM

[Jake2:]

"Numbers don't lie." Huh?

Feb 25 06:25 PM

[luis p:]

Do not believe the Wall Street cheerleaders, it is a huge bubble ready to burst, just like housing!

Mar 28 02:13 PM

[luis p:]

Hey, goldenpiggy it is possibly worth 20 cents in my value book!

Mar 28 02:23 PM

[luis p:]

Goes up over 300% in less than 5 years! And you say it is not a bubble?

Mar 28 02:27 PM

[luis p:]

Not a bubble! Someone has been smoking some bad Hookah!

Mar 28 02:30 PM