Too Soon to Move From Equities to Gold

As speculators, we are often very quick to impose our theories on the market - we think we know better. Yet sometimes it is important to take a breath, look at the market, and see what it is telling us. Remember that the market prices in our expectations, not reality. Therefore, the best trades have already been discounted and at the current time it is usually a sucker's bet. That is likely where we sit with respect to gold.

Ask a random Joe on the street if gold is a good bet right now - his answer is likely YES, followed by a list of economics 101 arguments which in theory hold true. Yet there's a reason why those commercials you see about quitting your job and working for 5 hours a week are nonsense. To be a good trader, you need to be ahead of the market. You need to be aware of what's going on in both the market and reality. You need to watch how the market moves when a particular piece of news is released and understand why - not just look at the quotes at the end of the day when all is said and done.

What we are currently seeing according to Mark Hulbert from Market Watch is a very bullish signal from the short term gold timing newsletters. I have only been following this commentary for about 6 months and I have been amazed as to how accurate this indicator has been in the gold market. I usually hear about important updates through Jon Nadler's daily gold commentary. I hope that bullish signal didn't excite you too much because this is in fact a contrarian signal. Usually when an asset tumbles, sentiment shifts to bearish. Think about this. Gold and the S&P are off similar amounts from their recent highs, yet S&P sentiment is extremely bearish, while gold is extremely bullish. Currently, 30.7% of short term timing newsletters are bullish, a higher level than when gold broke its previous supports down to $750.

As we saw with the passing of the rescue bill through congress last week, when an event is priced into the market there is little, if any, upside. Intrade had the odds at 90% of the bill being passed, a reflection of what was priced into the market.

I will say this - inflation fears are real! How it plays out is unknown. Gold is still pricing in too much inflation sooner rather than later. Deflation is a likely reality in the short term, depending on whether or not global governments and central banks are able to put confidence back into the banking sector.

I would still say own a small percentage of gold, it's just not the right time to cash in your equities and move it in to gold. That trade is already priced into the market.

Disclosure: Author owns out of the money gold calls.

Comments

[Toeser:]

I agree. If things get really bad, as in a depression, that is deflationary not inflationary. Nothing the market does surprises me, but a big bull market in gold is a real long shot in my opinion.

2008 Oct 07 08:07 AM

[xsuddensam:]

I have to disagree with you. This financial mess has me spooked. In spite of the too late hodge-podge and piece meal actions of the Fed and Treasury, equities are death. Anyone in their right mind would be getting out of all paper assets and closing their bank accounts. I'm out of equities and I've closed all but one bank account leaving only enough cash to pay next month's bills.

Gold and silver are the best bets now.

2008 Oct 07 08:09 AM

[Kelly Liebe...:]

It is amazing to me how many analysts who had no idea that we were headed for the economic mess of the century, now seem to be giving advice on what to do.
All over the news, and online experts were telling everyone "don't panic", "this isn't the time to sell", etc... Now what? Don't you wish you hadn't listned to them?
Self preservation is the operative word! Use your own instincts. If you had sold out of the market weeks ago while McCain was still telling you that the "fundamentals of the economy are strong", how much better off would you be? You could be sitting on cash or gold or silver that you could use to buy back into the market tis morning if you decided to - or next week. At least you would have a choice...
But, if you listened to the experts, you lost a lot of money and now you don't have as many choices...
Go back and read my oldest posts, and those of xsuddensam, maybe you still have time to save whats left of your money....

2008 Oct 07 09:18 AM

[montyman:]

Well, in regards to the idea that the S&P and gold are off a similar amount from their highs, I would like to point out that the S&P has been propped up with Super-human effort, while gold has not received this benefit and has likely been the victim of forces pushing it down... I'm just trying to compare apples with apples...

2008 Oct 07 09:49 AM

[Adam Katz:]

Kelly, thanks for lumping all analysts together. There's definitely a lot of animosity towards commentators and i'm not going to argue against with you because I don't agree with most analysts myself. But just for the record...

I was heavily long gold and silver earlier this year. My newsletters from as far back as last November called for the housing crisis to become an economic one. Then when I bailed on my silver position at $21.50 and gold at $1000 I was ridiculed by people like you calling me an idiot. So just because I don't want to cash in great stocks like Google at these low levels doesn't mean im not 'panicking'.

montyman, I agree that in the medium to long term the forces that be will result in gold outperforming the market as whole. Remember that intervention, the injection of liquidity, is bullish for gold.. maybe more so than for the market. My argument is simple, when will that credit find it's way to the market... when it does, you must be holding gold..

As an update, the effect of the 50bps larger than expected RBA cut has led me to question my short term outlook as that credit did find its way to the market. A global co-ordinated effort might indeed work its way through the system quicker than I had anticipated which would be bullish for gold.

Just as a note my disclosure points out that I own out of the money gold calls.

2008 Oct 07 10:09 AM

[User 30121:]

C'mon Andy, "getting important updates from Jon Nadler"????

Puleeeze. All Jon Nadler wants to do is bash those who KNOW that the gold and silver market is CORRUPT with MANIPULATORS. What information could he possibly provide that is NOT based on what PUPPETS, like him speak?

2008 Oct 07 11:23 AM

[User 30121:]

Sorry, I meant "Adam"!

2008 Oct 07 11:24 AM

[Smarty_Pants:]

Several good points made in the discussion. Long term is bullish for gold as all the injected liquidity will dilute the dollar. Author is right in that near term is less certain.

There are elections approaching and desperation measures may be made to maintain the appearance that the wheels are still solidly attached.

Currency interventions or gold bashing is possible until such time as it becomes too obvious that the dollar is devaluing. You will need to be long gold/silver at that point because the move will be large and fast.

Disclosure: I am profitably long in-the-money gold calls but considering hedging into a spread for the near term to capture current profits while maintaining the possibility of future gains.

2008 Oct 07 11:28 AM

[Marty & Luc...:]

It's interesting that you say we shouldn't "just look at the quotes at the end of the day when all is said and done", yet your argument is based on a newsletter.

2008 Oct 07 12:50 PM

[Adam Katz:]

My argument is based on judging the expectations that the markets are pricing in. I try and gauge that by watching how the market reacts to news based on whether or not that news was expected or unexpected. The newsletter is simply a quantified broader picture of timing sentiment. If you could understand sentiment with minimal error on a second by second basis, you would be a very efficient trader.

2008 Oct 07 01:02 PM

[Socialism c...:]

It's also the traditional season for a gold boom: people buy for fall weddings, and the Christmas holidays. And inflation is going to really heat up...globally. We're looking at concerted global currency devaluation. Best get some gold NOW (contrary to the author) rather than after the coming JUMP!!

2008 Oct 07 01:35 PM

[bowman711:]

But the big thing right now is inflation. While the whole world was watching Congress' antics with the $700-B bailout bill, behind the scenes the Fed pumped another $502 billion of new liquidity to the banking system with 'nobody' noticing. On top of that -

'Actions by the Federal Reserve include: (1) an increase in the size of the 84-day maturity Term Auction Facility (TAF) auctions to $75 billion per auction from $25 billion beginning with the October 6 auction, (2) two forward TAF auctions totaling $150 billion that will be conducted in November to provide term funding over year-end, and (3) an increase in swap authorization limits with the Bank of Canada, Bank of England, Bank of Japan, Danmark’s Nationalbank (National Bank of Denmark), European Central Bank (ECB), Norges Bank (Bank of Norway), Reserve Bank of Australia, Sveriges Riksbank (Bank of Sweden), and Swiss National Bank to a total of $620 billion, from $290 billion previously.'

All this means that they are scheduled to add $330-B to the already scheduled $290-B over the rest of the year. Added together, Uncle Sam, in the last two weeks, issued or is scheduled to issue $1,890-trillion newly 'printed' dollars to the system. This can only result in inflation, which will translate into increased prices for commodities - like gold.

On top of that, our (U.S.) Government is now pleading with other central banks around the world to participate in a co-ordinated issue of huge amounts of new monies. If this comes about, it will be even more inflationary. The question is, how long will it take for all this inflation to work its way into commodities? Answering that question (and each person will have to judge for him or herself) will tell you if it is too soon to buy gold.

2008 Oct 07 03:59 PM

[Adam Katz:]

bowman very well said! It's a matter of timing and my position is that the economy has a deflationary bias while the credit system is still clogged as this liquidity is not finding its way to market in full force. In fact, dollar liquidity is non-existant and I even saw a news quote last night that some asian banks were quoting rates as high as 7% yesterday. THAT IS NOT INFLATIONARY. That being said, we will ultimately arrive at inflation and the question of gold prices is whether or not the expected inflation gets discounted into a deflationary market. That's why there is so much uncertainty.

2008 Oct 07 05:11 PM

[CrisisTheory:]

Couldn't the 'safe haven' trade hold gold prices steady or range-bound while the inflation [expectations] work their way into the system?

2008 Oct 07 05:37 PM

[Adam Katz:]

The problem is that in the short term, we simply don't know what will be discounted. For the record the title of my article on my blog is short term outlook. SA editors didn't seem to think it was flashy enough. My goal was to show the uncertainty in the market in the short term. I have written a new article on my blog which should be on SA by tomorrow. In this article I try to explain my concern in the short term. www.plusev.ca/anticipa.../

2008 Oct 07 06:15 PM

[leonid bres...:]

my account with lands banki has just gone belly up.now face 3 months of wrangling to get my safe????? 65000 dollar deposit back.if ime lucky.what will it be worth in 3months.i have much more cash in other banks.my account with northern rock bs was frozen last year for 3 weeks last year.my hbos (these are uk majors) was inaccessible for a week.my wachovia account in us.god knows is it still there .your shares and pension funds are usually held in nominee accounts .with you as benificiary see a previous alpha post couple of days ago.these fraudsters will wipe your balance at the click of a mouse or push the button on the printing press and wipe out the value of paper cash in your safe.however they cannot ultimatley wipe out your physical pms.(gold and silver)except by force in which case were all doomed.until you have experienced the wipe out you are talking thro your xsss.let the author keep spreading the smell.dont worry helle wake up one morning to click his mouse button,just google any uk.newspaper

2008 Oct 07 07:25 PM

[Mark McHugh:]

Adam,

I can't fault your logic. If I understand you, you're saying you're willing to buy into the panic selling in stocks, but you're hedging with gold calls. That's not what I would call a "safety first" approach, but you may be rewarded for your nerve.

I have long gold positions, but I've picked up some market calls. When (or if) stocks bounce, gold will pull back. Sentiment-wise, it's the same trade.

2008 Oct 07 11:43 PM

[Jake2:]

"If you could understand sentiment with minimal error on a second by second basis, you would be a very efficient trader. " Good luck on that!

2008 Oct 08 01:47 AM

[Erick Tippett:]

Mr. Katz,

You are probably correct in your evaluation regarding the premature
gold bulllish expectations. I can see why Robert Prechter in his Elliot
Wave work has projected deflationary tendencies and a depression
for this period instead of inflationary. However, those who already
have gold are unlikely to sell it now! I'm certiainly not going to.

EDT
Chicago, Illinois

2008 Oct 08 03:40 AM

[Erick Tippett:]

Mr. Katz,

You are probably correct in your evaluation regarding the premature
gold bulllish expectations. I can see why Robert Prechter in his Elliot
Wave work has projected deflationary tendencies and a depression
for this period instead of inflationary. However, those who already
have gold are unlikely to sell it now! I'm certiainly not going to.

EDT
Chicago, Illinois

2008 Oct 08 03:40 AM

[Cesato:]

In my view, fundamentally Gold should rise significantly under the current environment but one has yet to wonder when and who is to going to create panic in the Gold market forcing buyers to go back and sell all at the same time. I believe Gold is worth as a long term investment, the safe heaven status is very much subject to markets developments and emotional market forces, if you bought Gold at 900 you are either going to keep it for 5 years in order to see a decent return or you dump it if the price drops to 800. Again, mass panic may force many to collectively look for exit and it is gonna have a great impact in this market as it has had in evey single market, its safe heaven status may become quick sands, when physical Gold holders found themselves stranted in the downward spiral, whoever was skilled enough to interpret the future bought Gold at 600 and is still holding it, if you have been lured to buy or did buy at USD 900, sorry but the pain will be felt, a full retracement to USD 700 may be in the works, I can't read the future either but plan your strategy for the long run and that run is from the 700 level up to over a thousand and it will take months if not years, think like an investor not like a trader, traders are always picking a top and a bottom, INVESTORS DETERMINE THEM. Doesn't UDS 925 look like a top short term and doesn't USD 925 look like a massive double top if prices cannot hold about USD 900? probably (and ironically coz Gold itself is the hedge against other things) hedging physical Gold andn paper Gold between 700 and 900 would be wise for now and then unlock the Short paper Gold on December or January for wealthy investors, well you have already made the money and can risk it the way you want by being rich you are already wiser than me so this lines are a laughable attempt to look at market objectively and not emotionally

2008 Oct 10 03:26 AM