Gold is Now At the Deep End of the Pool.

For me, the best case scenario which I have been predicting for nearly two years has arrived. But as much as I love gold for the long term, I have to take note when a number of short term technical and momentum models start flashing red lights that it is entering extremely overbought levels. The yellow metal has now risen for 12 out of the past 14 days.

Aaron Regent, Barrack Gold’s (ABX) CEO, the world’s largest gold producer, says he can’t imagine ever needing to hedge the company’s output again. Not a day goes by without an emerging market central banks making new purchases, with announcements this week coming from India and Sri Lanka. Gluskin Sheff’s permabear David Rosenberg, trotted out his own target for the barbarous relic of $3,000/ounce.

Look at the chart below of the S&P 500 priced in gold, and you can only conclude that gold has to reach $10,000/ounce for the ratio to reach the last trough we saw in 1979. Higher predictions are more common that National Rifle Association bumper stickers at a Sarah Palin rally.

I remember all too well when gold last traded like this in that earth shaking year. Just as I boarded a flight in Hong Kong, my long futures position ticked $750. By the time I landed in Johannesburg 20 hours later, it was trading at $900. I bailed. The fat lady then sang, and gold then bled for 20 years. Investors married to their positions got wiped out.

Traders who stay involved here should do so only against buying cheap out of the money puts for insurance. Remember, this is the commodity that takes the elevator up and the elevator down, and year end book closings are not far off.

To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.

Comments

[jclarkv]

All the 'short term technical and momentum models' starting to flash red, but in the context of QE2? No so reliable, me thinks.  Gold can stay overbought for a long time.

[goldfish1]

in the context of QE2?

Exactly the right question.

[SheepDog-One]

'Red lights' have been flashing on gold for 12 days, but no red light flashing 'overbought' concern on equities which have been pumped daily all year? Its all nuts, no sense in any of it.

[RockyRacoon]

Check out this WSJ viewpoint:

Gold Mania? Not Quite

The public bought about $5.4 billion worth of gold.

But the story doesn't end there. At the same time, others were selling gold. Lots of it. I was walking through the mall on Saturday when a young woman came up to me, thrust a plastic bag and leaflet under my nose, and asked me if I had any old gold jewelry to sell. The company she worked for would do a deal on the spot.

This is a new twist on a well-established business. In every major town there are stores that do a busy trade buying and selling gold. As the price of gold has risen, more and more people have been ringing the bell. In an economy like this, where so many people are struggling, it is a tempting offer.

How much has been sold? Nobody knows for certain. But GFMS says the figures so far are about 10% to 20% higher than last year. Some very rough numbers suggest sales through the first half may have come to about 70 metric tons or so–worth maybe $2.7 billion.

So if individualsbought $5.4 billion worth of gold, and sold about $2.7 billion, their total net investment comes to $2.7 billion. These are the figures through early summer: July for the bullion funds, end of June for the physical gold.

Are these bubble levels? Is the mania near its peak?

Try this. Through the end of July, according to FRC, investors poured $22 billion into emerging markets mutual funds. And a remarkable $155 billion into bond funds. Compared to these figures, the amount invested into gold is chickenfeed.

[blunderdog]

I'd be very wary of comparing mutual-fund inflows to gold, simply because so many working people have 401Ks which can only invest in extremely limited fund options.

Never gold.

I suspect the majority of the population is still well-convinced that giving 5%-10% of a paycheck each week to Fidelity (or whoever) is a good way to provide for their future.  Even when all the choices they can select from are crappy investements providing a negative return.

[Mercury]

The people who have been really ringing the bell aren't the folks who could use an extra few bucks in their pocket but the dealers who have been buying up all that retail jewelry scrap for a nice discount to melt value.

[EscapeKey]

Well, this, plus the fact that the move in PMs don't really stand out when compared to commodities in general. Why is it that when ALL commodities rise = supply issue, DEFINITELY NOT INFLATION, but when gold/silver does, OMG IT'S A BUBBLE?

[anvILL]

Agreed.
I don't see the point of using a technical indicator that "flashes red lights"  when you you can just easily write a trend line below the gold price or a 10 day moving average to determine when to sell, especially in a situation when it stays overbought.

[MarketTruth]

CHARTS can not account for QE2 and perhaps TARP2, let alone the increased deficit spending, the ongoing and deepening financial crisis and currency wars. The good news is that weak hands will sell their gold to strong hand, as we all saw happen two years ago.

[Stun Gun]

+ 10

[UninterestedObserver]

Yeah lets all sell gold right BEFORE a currency war? I think TA should be used with a large dose of common sense.

[rocker]

Maybe MHFT is the contrarian indicator. Maybe gold is doing what it should. Correcting Up. Just like silver, the markets, and anything else one tries to short. Marc Faber made the comment long ago. Watch Bernanke, he will print, print, and print again and again. As Marc Faber said,: "All things will go up".  Past comments speak for themselves, right on Marc.

[mamba-mamba]

Faber is still long-term bullish on gold, but warned there might be a pullback this month. FWIW.

I don't have a link. I just read it somewhere in the last day or two.

--mamba-mamba

[Hansel]

MHFT not being on board is bullish, IMO.

[nevadan]

In his last letter Faber is also warning of a short term top in the euro

[trip nixon]

Don't markets usually price things in before they happen? The markets tend to anticipate things like QE2. Gold is a sell here, although it could rise a bit more.

[Hansel]

Markets don't see anything coming.  Remember Bear Stearns?  Efficient market theory is bullshit.

[UninterestedObserver]

And trade your gold for what? I seriously doubt that QE2 in the tune of 1 or 2 trillion will somehow strengthen the dollar. Will a few trillion added to the deficit make Cj=hina love us more or want to let the Yuan float while we debase our currency?