Why I'm Selling My Gold and Silver

I think this market is getting stupid. But of course, the market doesn't give a rat's derriere what I think. It is going to do what it is going to do, and what the Dow (DIA) has done is go straight up over the past two months.

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The move is beginning to look parabolic and in my opinion, this is getting kind of nutty. But, as we pointed out on Wednesday, it could get much crazier. Moves have also been parabolic in some emerging markets, and are showing no signs of slowing. However, the upswing is becoming narrower and many important groups are not participating. Or if you might be an optimist, have not yet begun to participate.

Take small caps for instance. Small caps have been moving sideways. It is an axiom that financial stocks must participate in a genuine bull market, or at least it used to be. But, I cannot imagine that any move is sustainable without the supporting financials.

Banks have not participated, but perhaps they are about to move through resistance. And, it stretches one's credulity even more if the brokers and asset managers move in the opposite direction of the indices.

Is the market healthy if the consumer is not healthy? Technically, commercial real estate is breaking down. The Dow Jones REIT ETF, (IYR) of which I own long-dated puts, broke near term resistance on Wednesday.

But, gold is rolling over.

Gold, I believe, is the proverbial canary in the coal mine. Gold, like stocks, has been a benefactor of the oceans of liquidity being credited by the world's central banks. Gold, like stocks, is also benefiting from secular changes in the global economy since demand for gold has been rising as both India and China grow wealthier.

It is possible that gold is under pressure for technical matters. The European signatories to the Washington Agreement II have stepped up sales of gold the past few weeks, Spain in particular. It may be that the price of bullion will rebound after the selling is done. However, the action in gold stocks makes me believe otherwise, and perhaps something deeper is occurring. So I'm selling my gold positions, and will probably sell my silver stock, as well.

I am amazed that the market is rising on speculation that interest rates may be cut. Let me re-phrase - I am amazed that the Fed would consider cutting interest rates unless the economy was in serious trouble. There is so much liquidity sloshing around the world right now, it is hard to imagine the world needs more. To the stock market, it would be like a crack addict getting a fix. And the higher the high, the harder the inevitable hang-over will be.

Having said that, it makes no sense to complain. Instead, we take what the market gives us. I will start looking to slowly peel off long-term investments, or investments I think may be vulnerable when the inevitable down-turn begins. However, short term opportunities exist. Perhaps the safest way to play the near term momentum would be to buy small positions in sector ETF calls such as materials, industrials and telecom, expiring in several months. That way, if the downturn occurs before I sell, I will be protected on the downside.

I believe it is important to think about the downside right now.

Comments

[Bob Kirtley_]

Gold is just above its 200 DMA so we doubt that it will drop much further. This situation is very different from last May when the gap between gold and its 200 DMA was huge. It will be rocky, but sell! Not us.

2007 May 17 08:56 AM

[ottorock]

Speaking personally, I would sell a lot of other things before lightening the physical heart of my portfolio. That said, a good note. I took a couple of things away from it.

2007 May 17 09:29 AM

[NaplesJack]

Fundamentally, Gold is looking promising.
Physical demand is up. Mine production is down. Fiat money is debasing due to the massive liquidity world wide. Major exporting countries are looking to "lighten up" on their massive USDX holdings, so they'll buy some precious metals. World has become "scaryier" due to Iraq, Iran tensions, N Korean threats, Muslim unrest, Oil shocks, and emerging Countries economically challanging the Developed Nations.
All of the above motivate people and Nations to seek safety in Gold and Silver.

2007 May 20 01:11 PM