Cutting Our Gold Position As Mania Continues

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Includes: AGOL, DGL, DGP, DGZ, DZZ, GLD, GLL, IAU, PHYS, SGOL, UBG, UGL
by: Roger Nusbaum

Gold has gone parabolic this year, really over the last couple of months, as a perceived flight to safety for fear of ongoing US dollar debasement. You may have heard that the SPDR Gold ETF (NYSEARCA:GLD) is now bigger than the SPDR S&P 500 Trust (NYSEARCA:SPY).

The fundamental argument for gold is pretty good as there appears to be a willingness to sacrifice the greenback in trying to revive the US economy. While I cannot be certain, I think the non-investing public is far more aware of what gold is doing than it was two years ago.

To me, this is evidence of mania, really a mania that has been ongoing for a while now. In addition to the fast rise in price we are seeing price targets continue to go up faster than the actual metal. We are close to $2,000, which would not be a heroic move, but as $2,000 gets closer, the extrapolators are now calling for $3,000 gold or higher.

Our clients have obviously benefited from our position in GLD as I view it as a core holding as a form of insurance against certain types of shocks and as an asset that usually has a low correlation to equities. However against the mania I perceive we sold 1/3 (subject to rounding) of our position early in the day on Tuesday.

A lot of the behaviors with gold now are ones we have seen before. For example is gold a "chip shot" from $3,000 (a reference to a comment by the late Joe Battipaglia about the Nasdaq going to 6,000)? And is GLD becoming the biggest ETF by assets under management similar to Cisco (NASDAQ:CSCO) being the largest company in the world for a short time in 2000.

No doubt some will comment that the sorry state of the US makes gold different and while I generally agree, fundamentally we have seen these sort of anecdotal indicators before. While the gold case may still be intact, the thing I cite are negatives. Obviously the rapid price appreciation has allowed gold to grow in relation to the portfolio size which makes trimming it prudent and obviously if we sold 1/3 of our position we still have 2/3 remaining.

Disclosure: Long GLD