Last year’s sure thing is rapidly turning into this year’s sure loser. After bringing in a torrid 29% return in 2010, the barbarous relic has only managed a flaccid 7% loss so far this year, much to the distress of hedge funds and gold bugs alike. The triple top on the charts that set up over the last three months could not be more clear. What is giving traders ulcers now is the prospect of a much more serious sell off in the yellow metal in coming weeks and months.
They are right to be worried. The shift out of hard assets and into paper ones, like stocks, has been undeniable in 2011. One of the main drivers for gold in recent years has been buying from a newly enriched middle class in emerging nations. They have been joined by their own central banks, which have been scrambling to find alternatives to the US dollar to store massive reserves generated by record trade surpluses.
It’s looking like inflation fears are going to pee on this parade. A witch’s brew of rising commodity prices, soaring real estate, and increased wage demands has sent inflation over 5% in China. Much higher figures can be found in India and Vietnam. This is prompting governments to sharply raise local interest rates, making gold a less attractive investment alternative.
That’s just for starters. The CFTC has already raised margin requirements for the entire metals complex to dampen unwarranted speculation. While JP Morgan and Goldman Sachs managed to get “grandfather” exemptions to keep the markets open (as I do), most smaller players are having to pay up, increasing the amount of capital they must commit to each trade, reducing returns. Small and medium sized hedge funds and wealthy individuals trading on margin provided much of the juice for last year’s bull market.
Have you seen all of those late night ads on TV offering to buy your old gold? These fly by night companies have send scrapage supplies soaring to four times 2009 levels, even though they often only offer ten cents on the dollar. The rise of this new supply has been so fast that many wholesalers are becoming glutted with inventory.
The selling has been so aggressive, that it has spread like an out of control virus to the rest of the entire metals complex. So far this year, silver (NYSEARCA:SLV) is down 8.5%, and platinum (NYSEARCA:PPLT) %. To throw the fat on the fire, one large hedge fund was seen yesterday unloading a long term position which took it down to a new three month low at $1,224. Others such hurried liquidations are expected to follow. This is truly the commodity that takes the stairs up and the elevator down.
To prove that I put money where my mouth is, I have been actively shorting gold for the last few weeks. “Macro Millionaires” who followed me into my options play are now up 25% in ten trading days, and have been up as much as 35%. If you can’t, or don’t want to put the options trade on, you can look at the 1X short gold ETF, (NYSEARCA:DGZ), or the leveraged 2X ultra short version (NYSEARCA:GLL).
How far can gold fall? Let me provide some frightening downside targets:
*$1,324 – The October and November support level we touched today.
*$1,277 – The 200 day moving average, the next stop.
*$1,150 – The summer, 2010 low.
*$1,050 – The old resistance level that was shattered in October, 2009 by the Reserve Bank of India 200 tonne purchase.
*$1,000 – Worst case technical support suggested by analyst Charles Nenner.
Mind you, I think gold is still going up long term, and think that the old inflation adjusted high of $2,300 is a chip shot in a couple of years (click here for “The Ultra Bull Case for Gold”). This is just a little counter trend scalp to take advantage of overly bullish traders who have been caught off guard.