Sunday, November 8, 2009

Gold May Be Making a Short-Term Top

There is increasing evidence that gold's price has moved up too far, too fast. Please consider the following article, titled Toledo consumers turning their gold into green. Here are some excerpts:

But while the price of gold has risen, demand for the metal has fallen in many sectors -- such as electronics manufacturing and dentistry -- while its demand as an investment vehicle has risen sharply, according to the World Gold Council, an industry advocacy organization. . .

"People are seeing [the price of gold] in the news and starting to go through their jewelry boxes and bringing in things," said Ed Szymanski, owner of Estate Jewelers in Sylvania. "Before, we just got people coming in to pay their rent or stuff like that. Now we're seeing more affluent people coming in and clearing out their jewelry boxes to cash in on the price."
When "affluent people" cash in on the price, they are doing what the smart people did when silver was bubbling to or from $50 per ounce in the days of the Hunt brothers doing their Icarus imitation 3 decades ago. And remember that earlier this year, the story out of India was that people were finding $900/ounce expensive. They are loving $1100? You can completely ignore India's central bank purchase of gold on the other hand; central banks are "forever" holders in theory, this was a political deal with the IMF, and India has almost none of its reserves in gold anymore. That gold soared allegedly on the India news smells like distribution from the smart money to the public to me.

Paris is in gold (click on image to enlarge). Uh oh. Harrod's is going to sell gold in its London store. China is off-loading gold onto its people. Germany is reported to be in the process of allowing gold to be sold through vending machines:

Jens Willenbockel, an investment banker who saw the machine while passing through the airport, told the Financial Times that he believed there could be a market for the venture.

"Because of the crisis there is a lot of awareness of gold," he said. "It is also a great gift for children – for them getting gold is like a fairytale."

Once gold becomes a gift for kids, it's probably over-owned. And is Paris Hilton more likely to be a contrary indicator or an expert who's ahead of the curve?

The whole gold ETF story could one day be looked at as a scam, just as the Internet bubble was a scam. These ETFs could just be a place for unwanted, over-produced gold to be dumped on the public. Tell me gold's worth $400 an ounce or $4000 an ounce; I can accept a case for each. But I can tell you for certain that the Dow is not worth 40,000, and it's probably worth a tad more than 4000.

From a technical standpoint, even this calendar year gold traded around 800. When a major commodity such as gold has an over 30% year on year surge, that's huge. Can it keep it up? Yes, a la the S&P 500 in the 1995-99 time frame. Will it? I dunno. But at least the S&P pays a dividend; and it was a horrible investment on a longer-term standpoint. Gold costs money to have an ETF hold it.

Fundamentally, neither silver nor platinum are anywhere near their 2008 highs and have only fair long-term charts. Therefore it takes more courage to own them; it takes no courage to hold gold now.

People who have a lot of gold may want to sell some or hedge by selling options. Gold is definitely NOT in a bubble. But it may be ahead of itself.

Copyright (C) Long Lake LLC 2009


  1. It is all relative to the price of the USD. BTW demand for gold (ex central bank) for india has only gone up. selling at 900 was an old story.

  2. Not many people own physical gold as an asset. Why can't gold go higher if people decide to allocate a modest amount, like 10%, as part of a diversified portfolio? I don't know if it's gone up too fast short-term, but it's still 50% below the inflation adjusted price from the '80s.

  3. This comment has been removed by the author.

  4. How does one trade a short term top in a bull market?

    First, is one a trader? Can you time the markets? Is that your approach?

    Taking a little from a position with a strong gain might be a good idea, especially if the position is outsized. Reducing leverage is the most likely course.

    Here is a technical analysis of the gold bull market. It is coming off a protracted consolidation and a serious test of the downside that cleared out many of the weaker hands.

    So, how does one play a bull market? We sell strength and buy weakness if we are trading. If we are not, we do nothing.

    Personally I tend to hedge some positions but there are others I leave and do not touch for years while the bull is intact.

    Gold is very lightly held on a broader basis, and the upward pressures from the physical offtake of bullion is compelling as we most recently have seen.

    Gold started a bull market around 2001, and is still going strong.

    Trade a little if one must, but never lose your position in a bull market until you are sure it is over.

    And there is nothing here that would tell me that. Just more worry added to the wall of worry.

    But if one is a trader, then by all means trade, both in and out.