Why a Gold Bug Isn't Buying Gold Now

I am a gold bug, there is no question about that. I am also a long-term bear on the USD because I know that Washington will never reverse their fiscally irresponsible ways of the last 30+ years. However, I feel that gold has made a huge run in recent months and the USD has made a big move to the downside as well. This will not continue as stocks are beginning to struggle and earnings are not as good as many have expected.

This means that the dollar will more than likely see some strength in the short run, driving stocks and commodities lower. This will certainly drive gold below the $1,000 level which will bring about a much better buying opportunity for those looking to buy. Not to mention, other metals have largely been ignored in the recent run up in gold prices, i.e. silver, palladium and platinum are well below their 2008 highs.

Whether or not this equity rally was liquidity induced or not is really irrelevant. The one true correlation that we can draw is that the dollar's losses were stocks and gold’s gains. This will stop as we see a reverse in this trend in the near-term. I see this happening based on the trading patterns over the last few days and the market rally losing its ability to sustain itself. It is really unreal that the market could simply continue to move higher without much skepticism from participants on this fantastic move, but it is what happened.

The one thing we know is that at no point in history have we ever seen such a snap back in equity prices in such a short period of time while we shed jobs and credit continues to contract. Not to mention economic growth is anemic at best. Subtract government activity and it is downright ugly. But buyers in the USD will come back as the bearish trend in the short-term is actually bullish. Also, the dollar's inability to maintain a new low makes me think a rally is in store in the next few days, which is bad for stocks and precious metals.

Because of this, I am not buying any metals right now with the exception of palladium. It is my favorite and in my opinion has the most to gain no matter what happens. My feelings on the USD in the short-term explains why I am short the market right now. I opened a position 10 days ago and added to it on Monday. I will more than likely add to it.

No matter how I run the numbers I am coming up with a fair value of the S&P 500 of between 800-900, but that is my opinion and what makes a market. Eventually, valuations will have to matter in equities and a stronger dollar will force a revaluation quickly. On the flip side, a major devaluation would do the same thing.

On a long-term basis, until Washington changes its ways there is no way anyone can be bullish on the dollar. Therefore, I am a buyer of metals on a longer term basis. But I prefer to use my head and unless something happens over the next few days, I see no reason to change my mind.

One important note: I already have a healthy position in all metals and I am not a seller, I am just not committing new money at this time.

Comments

[frdm45:]

Is it possible with all the negative sentiment worldwide about the dollar that any pullback in stocks could lead capital to other safe haven investments - i.e. gold - and will we get to a point where gold and the dollar will decouple, and unless the global and domestic economic situation corrects positively in the extreme (which I think everyone agrees is doubtful in the short term) we will get to a point where we always see gold strength regardless of what the dollar is doing?

Oct 26 07:04 AM

[sdavid0419:]

Big fast build ups usually do get followed by some profit taking. Nothing goes straight up. As to the market correcting in the short term that is another thing. I vividly remember tech stocks continuously climbing for several years with no logical reason before the bubble burst. The same for housing prices. Unemployment numbers (U2) absolutely do NOT support any further growth in the markets yet my anticipation is these guys will continue piling on until that bubble bursts also!!!!! As to the metals I'm a BUG too and I'm not currently buying or selling as I believe the coming inflation will determine where the top is and since we can't even get the government to acknowledge the inflation we will have to continue monitoring this ourselves.

Oct 26 07:20 AM

[ManAboutDallas:]

The surprise of the Coming Stock Crash, the one that is going to take us to Dow 3000, or lower, will be NO "flight to US$" as we saw last year.

The US$ is the new Carry-Trade-Currency-o... and, as such, it will be used like the cheap whore it is.

Oct 26 07:33 AM

[Ridge Hill ...:]

gold hasnt had any move in the last year and half......like gold at 400 and then 700 .... gold consolidated and then moved higher

at 1050 the same it consolidated and is now ready to move higher

a quiet bull market for 8 years

US dollar is well above its lowes set in 2007/08 long before the crisis....the flight to liquidate is over....and ongoing

a gold bug i am not....invested in commodity cycle vs avoiding us equities I am...recall the 70s ....

in the next month this forecast may be true....but

Oct 26 07:35 AM

[pdtor:]

Good strategy, long term bull for gold, but weakness is now showing. I too have a long position, and am in the enviable spot where I am happy if gold goes up or down. If it goes up so much the better, if it spikes up violently, I will sell some. Otherwise I will not short gold, but it goes below $1000 I will add to my position.Same goes for position in silver

Oct 26 08:56 AM

[USisCorrupt:]

Well Ray the China Put will keep a floor on Gold @ $1000 with NO Problem. And with their 1.7 Trillion worth of US Toilet Paper and the US debt to be 2 Trillion on the budget next year up from 1.4 Trillion this year, I think Gold at $10,000 an oz is still cheap!

Oct 26 09:27 AM

[5142152-337:]

Thank you for the sensible article. The first two posters really were on target.

The housing CRASH that is about to occur in 2010 along with the steaming full throttle spending of the Obama administration is going to fuel even higher prices for the PMs. No doubt, the USD will start to perk up, but the oil sham (dont forget oil, right?) will stabilize any anticipated downturn in PMs. IMHO silver is where to be NOW. Its volatile, yes, but the return on investment will be staggering given its relationship to gold.

Oct 26 09:29 AM

[MGA_1:]

Hmm... more short term based building then a rally down the line - seems reasonable. I just can't fathom something terrible is not going to happening with a broke US public and 1.4 trillion dollar govt deficits. Who's gonna pay for all this?

Oct 26 09:36 AM

[doubleguns:]

This simply means a buying opportunity might be in the cards.

Oct 26 09:55 AM

[jimmy46:]

The one thing we know is that at no point in history have we ever seen such a snap back in equity prices in such a short period of time""""""

And the fed government has never printed money like they have in the last year.
What's the surprise?

Oct 26 12:26 PM

[Mayascribe:]

Guns: I'm on board with you, I've been buying gold today, only a very little bit, though.

Oct 26 01:34 PM

[silverwood:]

I agree with the author that a US$ rally(shorts covering) is quite possible near term, resulting in stocks, commodities, etc pull back. Nothing moves up or down in straight lines.

Oct 26 02:07 PM

[The Recusant:]

Well the author hit the nail on the head as today (Monday) the dollar rose and the equities dropped along with oil, gold, and silver. If this is any indication of what we can expect over the near-term, hold your bets on the PMs until a bottom is reached and then fill up on them. There are still too many unresolved issues like the housing market, additional quantitative bailouts, unemployment, credit card defaults, and the general sentiment toward banks and the market to assume the worse is over for our economy. Although there has not been anything more than a few 4% pullbacks since March, the big one, a 10% minimum drop, is still to come.

Oct 26 03:26 PM

[tripleblack:]

I am buying silver on the dips. Good article, I like the logic.

Oct 26 03:28 PM

[GOING LONG ...:]

JUST KEEP BUYING----LONG ON PM

Oct 26 04:05 PM

[sweetspot:]

Don't forget, this is COMEX gold and silver options expiration week. The big Wall Street bankers always try to push the PM prices lower to cover their short positions. I think this is why we saw such a steep drop today for no fundamental reason.

Oct 27 12:10 AM

[Tom Szabo:]

The article makes reasonable sense, but why not sell some (at least stocks) on strength? How many people are able to continually buy meaningful position size without first having taken profits and thus freeing up some cash?

Oct 27 04:33 PM

[437339:]

Sweetspot,

Very good observation . Thank you .

Oct 27 05:20 PM

[Plan B Econ...:]

In terms of fundamentals, gold is probably overbought:
www.planbeconomics.com.../

But when you see markets crash along side with the US dollar and US Treasury market...then you know the end is nigh. Gold and a shotgun will probably be worth owning then...particularly for US citizens.

Oct 27 05:43 PM

[Analyste de...:]

I don't look to Gold for high Alpha, but rather low Beta.

I'm not a chartist, and as an asset allocator I've struggled to understand PMs for many years. I intuitively knew my colleagues were all wrong (dismissing Gold altogether), but I don't buy the wild optimism/dire pessimism of gold bugs either. I'm also opposed to thinking of Gold as a speculative investment; rather, it's just a hedge against a worsening financial & economic picture.

What percentage, PMs? I simplify this answer with the retort, "Whatever serious likelihood you'd ascribe to a Dollar Crash." (That's your MINIMUM, in bullion.) I also favor cycling 30% of Equity Market gains into PMs, after your paper portfolio gains +25%, +50%, etc. My rally Model is UP almost 60% since 3/9/09.

Asset allocation is a discipline, and I'm not so concerned with timing or today's prices (which will be irrelevant numbers after hyperinflation hits.) Gold is UP 50% since 3q07... while the money supply is UP +115% !. On that USD-relative basis, Gold would still be at discounted at $1,400./oz. So it's "cheap" now.

If the value of your paper currency will be debased & inflated in the near term, why not begin moving into hard assets with discipline? Temporary price fluctuations are a small inconvenience for the security of REAL value in bullion. As a wedge in the asset allocation, 10-20% sounds reasonable for an older, conservative investor.

I agree with the author in favor Palladium too: I suspect (fear?) we'll see that metal go parabolic within 12 months.

Oct 28 12:09 PM

[JW.USC:]

You were saying?

Just more hot air as usual from this one.


On Oct 26 07:33 AM ManAboutDallas wrote:

> The surprise of the Coming Stock Crash, the one that is going to
> take us to Dow 3000, or lower...

Nov 11 12:57 PM