Getting Out of Leveraged Gold

I have more than tripled my money being leveraged into gold over the last 10 months, and made money for some of my partners while I was at it. (I owe a big thanks to the guy that made me wake up and look at it in December of 2006, Al Blaine.)

But as the trend in gold continues towards the consensus which had a lower end near $1000/oz (for 2008), there are far too many uninformed investors “getting into gold”. That’s either a sign that the market is really about to explode and cause a bubble that will (sooner or later burst, unsuspectingly), or actually the beginning of smart money selling into strength, telling people about their amazing profits.

I got a call yesterday from a seasoned veteran, and it was good news. I think it was the HPQ he was given via the Compaq shares he originally purchased that put him in a good mood. His confidence has been restored in the market, he’s shorting puts again, and thinking that when the market stops hemorrhaging (sooner or later it will), investors who made money on gold will be quick to take profits, and buy stocks that are cheap. He points out that sooner or later the indexes will resume their timeless trek north by northeast, and the coming pull-back in gold will happen simultaneously as volatility evaporates and confidence is restored, sending stocks higher.

I agree with him, and I’m getting out of the leveraged gold positions only to move into less bullish gold positions, in the next few months, assuming strength continues. I will also be moving some of the profits ahead of the peak in gold, into more cheap stocks and using spare cash real soon.

Disclosure: Long YRI.WT.C.TO

Comments

[jt:]

"That’s either a sign that the market is really about to explode and cause a bubble that will (sooner or later burst, unsuspectingly), or actually the beginning of smart money selling into strength, telling people about their amazing profits"

The problem with making an "either/or? statement is that your investment choice universe is now limited to two choices. Unfortunately if both of those choices are wrong, that puts you in the unenviable position of being either wrong or wrong.

You haven't consider the possibility that the beach ball that has been held underwater for SO long by those who have made a killing holding it down under is finally escaping their grasp and heading to the surface many hundreds of feet above. The beach ball is the price of gold (and silver), those who have been holding it down is the Gold Cartel--the Fed and the Western Central Bankers, esp, using their bullion bank lackies, esp Goldman Sucks and JPMorgain4Elites-- and the "killing" is figurative both in the sense of making unfathomable amounts of money...and also in the sense of killing of the middle class of this country thru printing of fiat currency.

GATA has been shouting this from the rooftops for 10 years to mostly deaf ears...go to gata.com if you want to know about it...if you don't don't feel bad, you're in the majority with the rest of the sheeple people of this country tha actually believe you're receiving anything resembling fair and balanced from the MSM...the mainstream media. It would appear now that the jig is up and gold will start heading up to where it belongs. By the contrived CPI created during the Clinton administration that purposefully and grossly underestimates inflation, gold would need to hit over $2200 to reach its equivalent peak of $850 in 1980, but to hit its CPI-adjusted dollar value using the CPI from the Carter admin. and before, it would have to top $5000. And that's not taking into consideration the absolutely MASSIVE inflation of the dollar by the Fed (right now M3 is increasing by nearly 20%/year if not more--you do realize the Fed stopped publishing M3 in 3/06, yes?...and for only one reason...they knew how much they were going to start to inflate)...nor does it take into account the even more massive DERIVATIVE inflation of the dollar.

Well, I could go on. But I would recommend you rethink your choices and add a third one: Gold is just heading back to where it SHOULD be as the premier currency of the world for all time, along with its little brother, silver.

2008 Feb 22 10:58 AM

[whatajoke:]

JT, you are completely correct. It is people like Jeffrey who we buy more and more gold from, because they just don't understand how much more gold will go up in the next several years.

2008 Feb 22 01:04 PM

[Kunst:]

Well, that's what makes a market. Place your bets and watch the little ball roll.

2008 Feb 22 06:16 PM

[Richard Shi...:]

$1,000 is the emotional pivot point. A little past that and either you are in for real or your are out for real. Until then, it is just a "will we, won't we" tug of war, and a great trading game.

2008 Feb 22 09:45 PM

[01GTvert:]

This author is laughable. I'll gladly buy all the gold he's selling at this point and he can have my worthless semi conductor stocks. The fact that the FED will continue to print an endless supply of FRNs coupled with the crash in the housing markets and consumer credit virtually garauntees PMs and commodities will continue to rise.

2008 Feb 22 10:39 PM

[Gaucho:]

The author makes the assumption that the US is the only player in the gold game. At one time this was true then the rest of the worlds economies grew up. Many like China and India have excess reserves and their people tend to hold gold more than Americans.

China now has an inflation rate of over 7% and india is growing its money supply at over 20% and Europe is entering an inflationary period also.

Add to this the US dollar is falling like a rock and many people around the world are looking for a safe place to put their money.

No this is not a speculative bubble, but a long term trend based on world wide inflation and financial instability.

2008 Feb 23 03:40 AM

[E.D.Hart:]

Gold is the only currency to survive the millenia...I spent an hour reading several financial magazines, and newspapers at the airport today...they all made essentially the same old arguments against gold...because its been a poor investment over the last 25 years.

Wow...how about looking at economically relevant periods in history...like the last 7 years? Or look at periods in time when gold did very well and compare economic conditions then to now...and compare?

All the media gets the gold story wrong, telling people its risky, time to take profits at $400, er $500, er $600, er I mean $700, ummm at 800$ per ounce, oops I mean at $900,... oh never mind.

Gold may be lousy in certain types of economic environments, but that is not an argument against gold..bonds are lousy in certain econmic environments also, but we dont hear the press eschewing bonds, (for the most part) ...]

Real estate may be a lousy investment for nest ten years, so where are the experts calling for people to get out of their risky real estate and minimizing its place in your portfolio to 5%?

2008 Feb 23 03:53 AM

[Little Turtle:]

After reading few of Mr. McLarty's articles it seems to me that he's a bit 'out of touch' with reality. That's ok, he's probably a bit confused and just trying to get some answers to his doubts.
I totally agree with JT and will not add to it, but I would urge all the readers here to investigate more.
There are not so many periods in recent history we can compare to and this one, going forward, could become really ugly.
Do your research properly, perform your investigations seriously, maybe have also a closer look at recent cases like Northern Rock in UK and see how unethically and fraudulently the Governement is handling the situation. This might give a hint of what could happen in the U.S. -- and try to read it on british newspapers, since the americans are a bit manipulated, right now.
Then, I suggest you go here: www.jsmineset.com/
and you read this article, originally published on a british newspaper, the FT:
America’s economy risks mother of all meltdowns
By Martin Wolf
Published: February 19 2008 18:21 | Last updated: February 19 2008 18:21
Good Luck Guys.

2008 Feb 23 03:33 PM

[Jeffrey McL...:]

I said, I'm getting out of *leveraged* gold positions, only to switch into less *bullish* positions. I didn't say I was shorting gold.

I sincerely thank those who kept comments to level headed, adult, (not insulting) conversation. I appreciate your thoughts, as I hope you appreciate mine, in this open discussion we are so grateful to have available.

To those who are kind of insulting: You're all reading a financial blog, it's an opinion, ease up. Personal attacks? Are you serious?

JT, ten years ago, I was 13. Yah, I'm 23, want to laugh at me some more? I'm sorry, I didn't hear GATA "shouting it" when I was buying my first mutual fund. You're probably much more informed than me.

Mr. Turtle, sorry it's a little hard to take you serious. Is that your real name? You couldn't be more wrong; I'm not "confused" or "out of touch with reality". However, you could call me uninformed (I'm an engineer) on the topic of gold (Which should be obvious when I thank somebody else for making me look into gold a year ago). One more thing, I've been all through Jim Sinclair's site, he is just like every other gold bug; extremely informed, and 100% bullish.

Goodnight all, I humbly wish you all the best to you and yours,
Jeff McLarty

Disclosure - long gold...but will think twice about sharing my opinion again.

2008 Feb 24 03:14 AM

[atigrtrdr:]

gold,as well as everything else will eventually top out, but not till most everyone is involved. this will probably happen in a big way,like 1980 when price >parabolic and parttime after school kid wonders where is best place to buy silverdollars

2008 Feb 24 03:11 PM

[Derricson:]

I think everyone is taking this article in much the wrong way. Everyone seems to believe that gold will go up indefinitely during this leg. Yes it could make a much bigger move, but at this point in the move the risk is increasing with every dollar gold goes up, which is what Mclarty is saying. I have been following gold for over 6 years and it makes moves that brings out emotions that affect our trading habits and most of the time are not good. That is where you must watch out and evaluate where your goals lie.

I got back fully into silver in Oct., just before the move and what a frustration it has been. Picking the right time and right sector does not mean that I will make money. That is where the gold/silver sector is at. A lot of stocks are showing weakness in this huge move and no involvement by the big money or for at least the small caps. Which could be from many different reasons but mostly nobody is buying and they are selling into strength even with large moves in the metals.

To go on everybodys side, gold/silver will probably go up for the next couple years. But in the short term be careful, there must be buyers and there seems not to be any at the moment.
Great article and informing Mcarty. Keep posting.

2008 Feb 25 02:17 AM

[Barry Sotoero:]

Contrary to the author's comments gold will be going up for some time. We may see a small pull back in the weeks to come, but the inflation data that is soon to come out will not represent the interest rate cuts or the stimulis package passed by the gov. We will not see those inflation figures emerge till the end of 2008. So for know buy on the dips. Do not let people influence you to sell your gold!

2008 Feb 25 11:03 AM

[sixpackistan:]

I've been reading articles like this since 2002. First when it topped 375 then 400 then 500 then 600 then 700 then 800...the 'experts' have been wrong for a good five years now. I don't see the point in putting much faith in them based on their past record.

2008 Feb 25 05:55 PM

[Jeffrey McL...:]

Derricson - Thank-you for your commentary, compliment, and addition of value to the conversation. I will keep posting.
Smart Money - I didn't say "sell gold", I said, get out of leverage and into regularly bullish gold positions. Essentially, because i agree, we could see a pull-back here (Short term [weeks] and small [10's of $/oz])
Sixpackistan - I agree, there are a lots of 'experts' most are wrong, that's because this isn't an exact science.

2008 Mar 01 12:15 PM