Eight Signs Gold Is Headed for a Correction 27 comments
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by Louis Basenese
Two weeks ago I told you it was time to start shorting gold. And the recommendation, as I expected, ignited a brouhaha on our Investment U message board.
That’s because there’s not much middle ground. Most investors are either fanatical or supremely skeptical. If you have any doubt, check out the comments - and all the wonderful names I got called - on our website.
But since I’m a glutton for punishment, and since gold moved in exactly the opposite direction I predicted, it’s time for an update and a little clarification.
A Morsel of Clarification on Shorting Gold
Let me start off with a morsel of clarification. I don’t hate gold. I own it, or more accurately, an interest in gold via gold mining shares. And I believe a small allocation (5% to 7%) has a useful place in a well-diversified portfolio. Over the long haul, studies confirm it helps increase returns while minimizing risk - a benefit we can all agree is desirable.
But over the short-to-intermediate term - the next six to nine months - I think gold is a terrible investment. After breaching the $1,000 per ounce mark again, as I suggested would happen to my subscribers on February 2, it is overdue for a retracement back to roughly $700 per ounce.
Those of you who expected it to drop the day after I suggested shorting gold need to understand that “short term” doesn’t mean “this week.” Just because it moved higher doesn’t negate the point of the recommendation.
Long story short, I view shorting gold as a way for me to hedge my long-term holdings. For traders, it’s a profit opportunity to consider. And whether we see eye to eye on this is irrelevant. Ultimately, the market will be the great arbiter of our differences.
For kicks though, let’s address a few of those minor points of disagreement…
Shorting Gold is Not Really Contrarian
A small army of you suggested I was being an “arbitrary” contrarian when I suggested that it was time to start shorting gold. That no evidence, just a warm and fuzzy feeling, existed to back up my call.
Are you kidding?
Sure your “Cousin Vinnie”, as chronic poster Todd opined, the trash collector or the newspaper boy might not be investing in gold. But the rest of the lemmings certainly are…
- Investments in coins and bars increased 811% in the fourth quarter, according to the World Gold Council.
- Headlines abound in the mainstream press like this one from The Financial Times - “Gold primed to be ‘mania asset.’”
- Wannabe gold bugs are paying - willfully I might add - 20% premiums for coins and small bars. Forget buying gold, we should all become coin dealers!
- Investors - like teenage girls at New Kids on the Block concerts in the late 1980s - can’t reach out and touch the SPDR Gold ETF (GLD) enough. It’s now the second-largest ETF in the United States with a market cap of roughly $33 billion. With more than 1,000 metric tonnes of gold, speculators now control more gold than many industrialized nations. If that doesn’t scream “out of whack” I don’t know what does. Many of you respond by saying the investors here are institutions, so the inflows are not indicative of a top. You’re wrong. Individuals, according to Morningstar, accounted for an estimated 60% to 70% of the investments in the last four years.
- The world’s largest gold refinery is pumping gold coin blanks at a rate not seen in 23 years, according to Bloomberg.
- Reuters reports investment consultants are now advising pension funds and high-net worth clients to invest a 5% to 7% allocation toward gold and gold stocks. After being an investment consultant to such clients, I can confirm such allocations are new. And will be followed, if they haven’t been already.
- If you’re a newsletter junkie, like myself, no doubt you also noticed the sudden explosion in “gold experts” that have some overlooked, stealth play on gold you need to consider. It’s poised for 500% gains (or more), they say! All you have to do is read a 16-page teaser and sign-up for some newsletter. Marketers tap into what’s hot, typically as a trend is cresting. Don’t expect this time to be any different.
- From Thursday’s Wall Street Journal, futures investors are taking delivery of gold at more than double recent levels (4.5% versus 2%). Paranoia anyone?
If the above isn’t sufficient evidence to be a contrarian, I don’t know what qualifies then.
Why should I listen to you, Lou?
Others of you simply wanted to know, why you should listen to me - a Wall Street flunky, “idiot” or a “young analyst who thinks he’s got the magic touch and will never be wrong.”
Forget that the last reader - and yes it’s the chronic poster and my new “buddy” Todd - is completely clueless and didn’t catch my transparent about-face on the dollar here. Or my confession that I flubbed the rebound in financials.
I’m human. I will be wrong. I’m man enough to admit it. But I don’t think shorting gold will be one of those times.
And if I don’t have enough credentials to make such a claim, in your opinion, fine by me. Listen to someone more “qualified.” Plenty of them exist that are also starting to question the merits of investing in gold, or at least acknowledge the mania…
…Newsletter god Dennis Gartman says, “It’s a little worrisome that so many people are piling in [to gold].” He expects a pullback, too. Just not as far as me.
…Peter Munk, founder of Barrick Gold (ABX), says he’s never seen such strong interest in physical gold ownership.
…”This will all end badly, just like all other bubbles,” predicts Leonard Kaplan, President of Prospector Asset Management, a commodities futures brokerage in Evanston, Ill.
…”Historically, when stocks begin to underperform gold, that’s a sign that gold is running out of steam,” according to Ray Hanson, a technical analyst at RBC.
My Biggest Concern
What really scares me is that some people take gold investing to an extreme. They actually believe in a government-orchestrated conspiracy to suppress prices, as some of you revealed in your comments.
It’s pointless to engage in lengthy debates with conspiracy theorists. Logic means little. But let’s suspend disbelief for a millisecond and say you’re right, that the price of gold is being fixed.
Why in the world would you throw hard-earned money after the slim prospects of actually exposing and overturning the fix? Talk about a low probability of success.
But I digress. What’s most troubling is many investors, including some in my industry, say gold is a forever position and they are committed to “a lifetime pattern of purchasing” and will never sell. Some of you even revealed 50% of your portfolio is invested in gold.
Here’s the thing. I know that Christopher Columbus says, “Whoever possesses it [gold] is lord of all he wants. By means of gold one can even get souls into Paradise.” But if financial Armageddon unfolds, which many gold bulls predict and in some sickly way wish for, gold will be priceless and worthless at the same time.
How so?
If world governments collapse, social order goes to heck, McDonald’s won’t magically be set-up to “make change” for your gold bars. ATMs won’t spit out Krugerrands.
What’s more, even if the price of gold tops, say, $5,000 per ounce under such circumstances, what can you do about it? Cashing in on the gains means accepting the thing gold bugs completely despise, paper currency, in return. So indeed, it will be priceless, useless and worthless all at the same time.
Bottom line, the world isn’t set up to handle gold as a currency. Not now. Not ever. It’s merely an asset. And like all other assets, it’s susceptible to bubbles.
If you’re in the speculative mood, I recommend shorting gold in the coming months. Especially since, as the saying goes, “gold goes up on an escalator and comes down in an elevator.”
At the very least, examine your reasons for owning gold. If you believe the end of capitalism is nigh and financial ruin is imminent, just remember you need gold to be liquid, acceptable and portable for your investment to be really worth anything.
All three are big question marks, convincing me John Maynard Keynes was more right than most want to admit. Outside of a small allocation for diversification purposes, gold is indeed a barbarous relic.
I’m off to the message board to prepare for the onslaught of “fan mail”…
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that will add some weight to your argument and your own conviction.
a lot of investment u are run by charlatons like you who never dare to commit their opinions and words to real positions!
However, in my opinion, that gold is not the best solution. I do hold some, in the form of physical, GTU and stocks. But I hold way more silver, in the form of physical, CEF and stocks. If financial Armageddon does arrive then I think I havea pretty good chance of being able to use my silver (in all denominastions from dimes to 100oz blocks) as currency. My gold I would just hang on to until it is all over with the expectation that in rea terms it would be worth as much in the future as it was when I bought it.
I kind of following Howard Ruff's philosophy. Nobody should be buying gold or silvere until all debt is paid of and one year's worth of supplies are set aside. After that buy some silver for emergencies. But then I see gold as the next choice and, even if it going to correct as you predict, it is a better choice than stocks right now. So, YES, gold is probably due for a correction and now may not be the time to buy it, but I certainly don't have any intention of selling what I have and unless you are a trader I don't thing the profit/loss prospects are enough to risk shorting it.
For physical gold, I go out on the weekends with my dredge and mine my own.
The unknown factor! This equation consists of any and all conflicts that may or may not occur soon in the Middle East. Or if an attack of some kind may happen here in our own back yard. Long term any selling that may occur may be an opportunity for others too. Because the Stimulus Plan, or Stimulus 2,3, and 4 will not work sir. Within 2 years or less this Country will be in more turmoil than it is now. Evidence of this will be the Demonstrations that will occur before year end by Our Citizens across the Nation. Of course Violence and riots will follow. The American people have been fleeced of their money by Politicians,Government... and Wall Street. And although the old is out and the new is in, regarding the White house, many crooks are still in Power enjoying their daily lives
while unemployment continues to rise to record levels.
You may be right for the very short term about Gold, but long term Gold will rise above $1,500 dollars as sure as most Americans have been screwed royally as of recent. I called for a Depression not a Recession last May 2008 on your site and many others, and it will get much worse with no RECOVERY in sight. We are in a disaster mode, and the after shocks are forthcoming. President Obama and Congress will fail miserably and conflicts with foreign Countries will add to the over stressed weight of our backbone causing a total collapse of our system.
STEP BACK IF YOU WILL, AND LOOK AT THE TOTAL PICTURE.
IF YOU DO NOT SEE THAT WE ARE HEADING RIGHT INTO THE EYE OF THE STORM, YOU WILL NOT HAVE A PLACE TO GO TO FOR WORK ANY LONGER.
Saving this country is still possible but Washington has detoured us towards the abyss.
Time to put the brakes on, regroup and seek solutions. That means jobs for Americans not $13.50 extra in each paycheck. Now thats a joke courtesy of our politicians.
You can bet they're going to put more than another $13.50 in their own paychecks. And, if you've noticed, they're beginning their inevitable effort to rid us of our guns, too, just in case we don't like it.
On Feb 27 10:11 AM ROLEXROLEX wrote:
> The only reason gold will crash, not just correct, is that there
> is no money to buy bread.
> about 30% of its high.
Is this statement based on a corelation assessment or is it based on feelings? The correction has started, and 900 is the first target.
( See my older article here: aprioritrader.blogspot...)
As far as long run is concerned, gold is in a uptrend, and will likely resume its upward journey once the correction is over (in elliot-speak, we are in the fifth wave).
The author has a valid short term perspective. Of course, if you can find good businesses to buy right now - you will be fine in the long run. Meanwhile in the short term this is a good way to manage your positions.
-KaranZ
On Feb 27 05:52 AM sakata wrote:
> You make some good points wihich are difficult to argue with. However,
> if gold plummets to $700 as you predict then gold will only be worth
> about 30% of its high. Stock are already close to 50% of their high.
> Gold is still ahead. If gold drops 30% then gold stocks are likely
> to fall ever further so prudent investors should have stop loss
> orders on them. Anyone who bight in at the bottom last fall, as
> I did, is now looking at a healthy paper profit and it would be prudent
> to protect that.
>
> However, in my opinion, that gold is not the best solution. I do
> hold some, in the form of physical, GTU and stocks. But I hold way
> more silver, in the form of physical, CEF and stocks. If financial
> Armageddon does arrive then I think I havea pretty good chance of
> being able to use my silver (in all denominastions from dimes to
> 100oz blocks) as currency. My gold I would just hang on to until
> it is all over with the expectation that in rea terms it would be
> worth as much in the future as it was when I bought it.
>
> I kind of following Howard Ruff's philosophy. Nobody should be
> buying gold or silvere until all debt is paid of and one year's worth
> of supplies are set aside. After that buy some silver for emergencies.
> But then I see gold as the next choice and, even if it going to correct
> as you predict, it is a better choice than stocks right now. So,
> YES, gold is probably due for a correction and now may not be the
> time to buy it, but I certainly don't have any intention of selling
> what I have and unless you are a trader I don't thing the profit/loss
> prospects are enough to risk shorting it.
The huge increase in gold investment you are seeing is not reaching mania levels, but rather is building on the incredibly small amount of investment in gold.
As to your fifth bullet point, the world's largest refinery, Rand, had their gold blank inventory wiped out by a mere 5,000 oz order last year, per Bloomberg. So their production is not really off the charts.
Total dollar investment for gold skyrocketed last year to..... drum roll..... $29.9 billion dollars! Yes, that includes etfs, even though GLD is not required to hold physical gold.
So last year, we spent 6 times more on gold(world wide) than on chewing gum(in N America). People paid out almost twice as much for chocolate as for gold. Are we at mania levels yet? Not quite. People are just playing catch-up now that the long lull in investor gold demand is over.
You are recommending a portfolio to have at least 5% exposure to gold. the majority of investors are not there yet. You could compare the almost 30 billion in gold investment to the $36.6 trillion equities market. Or the $59.7 billion spent on gold jewelry.
Why do you have to be paranoid to take delivery of futures? It's just an attempt to sock money away relatively safely, and it's one of the only ways for an investor to get significant amounts of gold without a months long wait and huge markup. Are people paranoid to want a safe store of value for their money?
Are central banks paranoid? They seem to like to "hoard" gold. Why aren't they all dumping their gold at these ridiculous prices? Except England. Good move dumping that gold. I bet they're glad they exchanged it for trusty paper money! How's the pound doing anyway?
As for your idea of shorting gold, yes, you will still have plenty of opportunities to short gold as it continues a volatile rise.
I just don't think that we are anywhere near the mania stage of a bubble. There is much more bad news to come down the pipe, and the majority of people have no gold investments. Or savings, for that matter. Physical gold just isn't drawing that much money yet, even if you fudge and include GLD, as the World Gold Council does.
Most holders of physical gold will be content to sit on it for the foreseeable future, much like holders of cash and bonds.
The World Gold Council released a survey of investment advisers that shows gold at the top of the list of preferred investments this year.
When everyone is in agreement that gold is the place to be, that’s when you should be heading for the exits. Two of the interesting things from this survey stuck out to us – apart from the fact that gold may be getting ahead of itself
I was born in America, I have been nurtured and educated in America, I have served in its armed forces, and I am not willing to give up on America unless I am going down for the third time. Meanwhile, a policy of rationality and prudence is my choice.
Fortunately, we now have a competent, rational, and decent man at the helm. I'll put my money on him and invest my money on things of demonstrable value. Bubbles and panics are the problem, not a solution.