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What to do About Gold
Gold, gold, gold. What to do about gold? I get asked this question a dozen times a day, by some who have been long since the current move started a more than a decade ago at $260, and others who stood on the sidelines and watched in awe as it went to the moon, kicking themselves all the way. Is it too late to get in? They call the yellow metal the barbaric relic for a reason. Let’s face it. We’ve had a great run.
Gold is one of the top performing assets of 2010 by a long shot, soaring 15% YTD to its peak last week, nearly topping the meteoric rise of the 30 year Treasury bond. Investors did even better in futures, leveraged ETF’s like the (UGL), and gold mining shares.
Bulls are now facing the first test of their convictions in a year and a half, when it dipped to $680. At this stage, my inner trader makes me a short term bear. We may have reached an interim top, thanks to the aggressive purchases of emerging market central banks, as can be seen in the chart below of Russian purchases (click here to view at http://www.madhedgefundtrader.com/july-8-2010.html ). Scrapping of old gold has reached all time highs. Have you seen all those ads offering to buy your old jewelry at a big discount? That’s where it’s coming from.
As summer begins, we are entering a traditional period of seasonal gold weakness. The Indian wedding season, the largest annual purchaser of the yellow metal, doesn’t start until the fall. If you are the world’s greatest day trader, and think you can grab something here on the short side, then go ahead and knock yourself out. But you will be going against the long term trend.
Obama has not suddenly turned into a paragon of fiscal rectitude, and Ben Bernanke still has the keys to the printing presses. The Fed has yet to even admit its role in the credit bubble of the last decade. Fiat paper currencies are still running a frenzied race to the bottom. Politicians of both parties see the only way to win elections is to inflate.
Almost all short term money market alternatives globally are yielding close to zero, meaning that the opportunity cost of owning the barbaric relic is nil. They aren’t making gold any more. The output of gold has fallen by 12% annually for the past decade, compared to a doubling of production costs to $500/ounce.
Reserves everywhere are playing out, and top producer Barrick Gold (ABX) isn’t opening a new mine at 15,000 feet in the Andes because it likes the fresh air. I still think my target of $2,300 is a chip shot, but it might take three years to get there. There are higher predictions of $5,000, $10,000, and $50,000 based on ratios of gold to broadening definitions of monetary assets, but I won’t bother with those here. First things first.
Below are the support points on the charts, with my comments.
$1,165 Medium term trend support. Gold bounces here the first few times.
$1,107 -50 day moving average, probably holds, but a break signals a more serious pull back
$1,040 low in the last down move, where the Reserve Bank of India last stepped in as a big buyer.
$1,134- 200 day moving average. A logical target that sees a lot of long term buyers scaling in.
$680 The 2008 low-Not a chance. We aren’t going to get a full blown flight to liquidity we saw in that dreadful year. Very unlikely to get there, but the world is a big buyer if it does.
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 and a half 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.
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MAD,
Seems to be on key with your assessment.............Only way I see you being off, is ANY major conflagration/s come about, ALL bet's off....But everyone here is well aware of that, and chances are damed good something WILL happen.
"Data from the gold options market shows that smart money believes that gold will go higher in the coming months and that the recent fall in prices may be another correction and consolidation prior to another move up in prices. Open interest in options which allow holders to buy gold at $2,000 an ounce by December 2011 has surged a massive 11-fold on the Comex since May 11. Open interest to buy at $1,500/oz by the end of the year has fallen by 33 percent which suggests that gold market participants remain unsure of gold's short and medium term prospects but confident of higher prices in the long term."
http://www.24hgold.com/english/contributor.aspx?article=3009609346G10020&redirect=false&contributor=Mark+O
Technicals only work when the underlying population in the market has some continuity with the past. Once in a generation stuff is happening in the gold market making it very difficult to predict short term. There may be technical signs that a multi-hundred dollar correction is in order, but there are fundamentals driving people to buy, even into strength. Remember, very few people are 100% in gold, its just a hedge against Government stupidity (pretty much a sure thing). So it's easy to add to your position, because it diversified in other ways.
First the rising price of gold is really price discovery of the dollar. We don't what the Fed is doing because they don't want us to know, but I'm thinking it's not good and probably won't even work.
Second, a rising gold (falling dollar) price is not in the fed's interest, so they try to manipulate the gold price downwards. This has been well documented by GATA, and is done by having various large banks short gold futures, which they are happy to do, after all the Fed bailed them out big time. Besides they are borrowing the money from the Fed at <1%. They haven't been able to lower the price of gold for 10 years, but they keep trying anyway. It does keep gold from blowing off, which would reveal the dollar to be worthless, an undesirable outcome for the Fed.
I am in the camp that finds gold price suppression a perfectly logical strategy for the Fed to follow, not really a surprise. What GATA hasn't really discussed much is that the mere fact the Fed manipulates gold means that the Fed has continued to classify gold as money since the gold standard was abandoned. The whole "barbaric relic" refrain was always just propaganda. Anyone who thinks gold is just a commodity, not money, is fighting the Fed, and every other central bank in the world, not to mention the BIS and the secretive international bankers behind it.
In other words gold is resuming its role as money in the international arena. This doesn't happen over night, people come to this conclusion one at a time, then slowly begin building a gold hedge position. They jump into GLD because its easy, but eventually realize that paper gold isn't gold at all, but some kind of strange loan (just what you want in a credit crisis). Then they slowly move over to physical gold: allocated gold or actual gold bars, preferably held in vaults outside the banking system. The process is slow but inexorable, and is changing the population dynamic of the gold market. As this population of gold accumulators grows, they begin to overwhelm traditional forces in the gold market. Add the fact that central banks have become net buyers of gold, after begin net sellers for 30+ years, and the dynamic is becomes different.
In the end we live in a world where every fiat currency is failing; they are all taking each other down. If there was going to be a fiat replacement for the reserve dollar, the opportunity passed several years ago. The only possible replacement for the dollar is now gold. No basket of fiat currencies has the credibility, the G-20 won't be able to agree on anything, gold wins reserve status by default. Every day more and more people become aware of this possibility.
If you think that's a step backwards, you might be right. But the world's financiers have blown it so utterly and completely, we really don't have any choice. This is evolving into an emergency situation, and a new gold standard wouldn't be such bad way to restore stability. In a very weird way the gold suppression scheme is an attempt to keep the dollar and gold tied together, an invisible quasi gold standard that was never going to work.
Some of you doubtless think sound money, based on a new gold standard, is a much better alternative than fiat currencies, even though it might lead to less hypergrowth and globalization in the world economy. Either way, this outcome becomes more likely everyday.
Totally reasonable and jives with my conclusions. Even if the G20 forced themselves to agree on something out of fear of losing their control and influence (via the IMF) over sovereign nations, it doesn't mean their solution will be accepted. Meanwhile the natives will overthrowing governments around the world ... as it should be.
Technicals are valid because HFT computers use them to trade. HFT computers are 70% of traders anyway.
As far as fundamentals, there is no fundamental reason alone to buy gold. It's speculation more than anything.
You could very well be right speculating, but that doesn't mean that it's not speculation.
" It's speculation more than anything."
I had to laugh, because all the time that the markets were really freaking out everyone was complaining that speculation was occurring. No shit? That's exactly what markets do, speculate! Not speculating would be what, exactly?
Look, everyone is looking to push their "book," anyone who says otherwise is full of BS: nature is all about deception, humans are part of nature.
There are very few certainties, one of which is that resources are limited: and by proxy, so are printed "dollars;" though it's much harder to run out of print media than say rare earth metals. Gold, and other PMs aren't as rare as rare earth metals, but it/they are certainly more rare than print media.
Ultimately it's about "confidence," and we hear this repeatedly. And if we were to actually stop and think about it it would cause us to ALL bail from the current system/paradigm. How can we be confident in a virtual world, one that relies on a physical world whose quality is diminishing? We've lost track of reality, of the physical; nature, the real world, the one where PMs roam, will be the arbitor.
Correct me if I'm wrong, but HFT computers don't trade in physical gold. There is a reason to buy physical gold, if you want something you can hold that has value and will be exchangeable under almost any circumstances. That's about as fundamental reason as there is to own some physical gold.
I like the insurance of a stock of physical gold and silver, and that's why I've kept buying some here and there.
BTW, that junk wasn't me. I just think it's important to keep in mind that there is a pretty big difference between paper gold and physical gold.
both the S&P 500 and the Russell 2000 are both considerably more volatile than gold bullion
http://www.ezimages.net/upload/5MIN/bullion%20volatility.PNG
it could be theorized that buying paper equivalents of gold is pure speculation (chasing price) and buying physical is pure investing. In fact, between Dec. 2007 and Jun 2008, according to the Bank of International Settlements, the number of single currency interest rate derivatives in 'Other Precious Metals' went from 103 billion to 190 billion. Other precious metals is primarily silver which the physical market is, at most, $10 billion annually. In June 2006 it was 84 billion. So the paper players "invested" in silver at 20 times the annual world production over 2 years but physical buyers are speculators? I don't think so.
oh..forgot the link: http://www.bis.org/statistics/otcder/dt21c22a.pdf
I can't even imagine taking a dive into that pool. Besides, I don't know if I can out-guess JPM.
"They aren't making gold anymore"
This says they are. Not that it disputes any of the points made.
http://finance.yahoo.com/banking-budgeting/article/110069/the-insiders-f...
Gold production has slowed but I have not found empirical evidence we are peak gold yet. Unlike oil, which is much more obvious.
The thing that people don't understand about commodities is that the "peak" is only a peak at a certain price.
In the mid or late 90s, I toured a goldmine here in Colorado that was shut down because they needed at least 500 an ounce to make production profitable.
I'm sure it's producing now.
As the prices rise, so will production, and eventually prices will fall when supply exceeds demand.
I woiuldn't call anything peak yet. There's plenty of oil at 100 a barrel, and there's plenty of gold at 1000. It doesn't make those the right prices, but you get what I'm saying hopefully.
Prodcution Peak is Production Peak. Price has nothing to do with it, as markets correct for that.
As the poster above noted (I'm too lazy to confirm, so I'll just take his/her word for it and continue with my point), a yearly decline in production over the course of a decade for something whose price has increased would seem to validate the occurrance of a production peak. If 12% YOY, then production should be well under 50% what it was 10 years ago; this seems rather steep; because it does seem steep, I decided to break down and do a check, and a cursory view would NOT validate this steep decine (ref http://www.goldsheetlinks.com/production.htm): chart only goes to 2008; peak was about 83 million oz in 2001, in 2008 it was about 76 million oz, which is clearly not 50% or less as a 12% YOY decade-long decline would have placed it (going back 10 years to 1998 it was about 81-82 million oz); HOWEVER, the chart shows a pretty clear peaking trend (having occurred in around 2001). NOTE: a 12% YOY decline almost maps to US output.
You're right about that, JB. Let's see silver at $65-$70 and Aspen Ski Co will shut down the lifts and start mining again.
Rip up Virginia City and get that old Comstock Mine up and running! The Denver Mint was started up to coin all that silver that was coming outta the ground. Played hell with the economy at the time, but it got absorbed. Just as any large gold find would. Deflation is not a bad word unless your economy is debt based. Gotta get that interest paid!
Gotta pay, pay and pay some more. It's what keeps the wheels turning.
Don't look now but I think the wheels have fallen off!
so a 12% annual decline in production from a peak in 2000 is not "empirical"?
Gold is in supply decline; this explains the rise in price with basic supply/demand metrics, no need for vast conspiracies or apocalypses.
MHFT may be a dumass about a lot of things, but he is describing the peak phenomenon for you when he discusses the mine in the Andes and the production costs.
If you don't know much about mining, you'd go WTF <boggle> over a mine there. Why not just drill in S Africa or in Montana or something where "there's plenty of gold" or whatever you heard. Just like people who don't know oil boggle over deepwater Horizon which is a relatively unexceptionally deep or technically challenging well. Why not just drill more holes in Texas or something, I heard there was "plenty" of oil left.
This is how peak "looks" when you approach it or pass it, fragmentation of supply sources, increasingly WTFish locales and technical challenges that surprise laypeople, costly extraction and development.
MHFT,
1st support at $1207.
2nd at $1197
50 dma $1200
And if there is a meltdown in stocks, monie will not run to the bond market; the doelarr is a dead horse. Look for gold to inherit the wealth- this as it is still the World's Reserve Currentsea; it decoupled in the fall of '08, thus why during the spring take down of '09, gold kept its footing.
Oh, and silver has "March"ed with it; the next move will have platinum in lockstep with her two sisters, and this is when we will know the game is over.
The paper gold market will probably see a drop of a mild slope in concert with a much greater slope in SPX; they're both operated in much the same fashion, the difference being that, even at 100:1 leverage, the paper gold market is still based on something of value. Right now I'm at about 50/50 cash/physical assets, with about half of those physical assets in PM's.
"What to do about Gold?" Buy low, sell high.
They are reducing their premium for jewelry. Going for the bullion now.
Exactly. Now is not the time to buy. You have to at least wait for a good pullback, and if you buy after that you have to consider the time objectives.
If you buy toward the end of the bull, you have to sell sooner before the bear starts, etc.
You talk like things are going to get better JB?
This time IS different - regardless of the arguments for gold being a good play or not this system is going down...
This time it IS different for simple and obvious reasons staring us all in the face:
1. peak oil
2. unprecedented population levels and ecological decline
What isn't different:
3. the usual trashing of FIAT
4. global power swings due to rise fall of empire/ideological shift from free markets to socialism...
but they're (points 3 & 4) still going to compound the misery resulting from points 1 & 2
IMHO
You didn't junk me on the other page didja? Some f***er junked me on the other page; hit and run with no comment.
Support at $1207, no? Gold is looking strong, no? This in the face of a worldwide depression and a dead to dirt doelarr.....no?
;)
I don't junk people because I disagree unless they're retarded, and generally don't junk at all.
So yeah, 'twasn't me.
I wouldn't call 1207 support though. It just made it above that level. It can test it more than once before it breaks down...
I mean, it might be support, but I just don't see that at this point.
I still hold firm to my earlier calls in the 900s, but I could be wrong!
I know, I know...I was being rhetorical, as I know you don't usually junk; you state your case...which is why I respect you, if not your opinion (although we disagree...but so what?).
As for support, I refer to present levels. The future is anyone's guess....
You could be right!
Mr Lennon and JB. I feel the way you guys do (Rocky as well). I do not junk much, and I usually explain to the junkee why I did.
...
I am wrong so often it doesn't even bother me much anymore when I am yet again. That's why I don't trade! The 6 times I bought put and call options (years ago), all 6 times I lost part or all of what I put up.
When I used to go gamble in casinos, 90% of the time I walked out a loser.
You are either a good trader or you are not. I am not.
How does this fit in with Gold? I have been buying incrementally since the 1980s. Never will sell. Will give it away. The best Wealth Preserver in town. I do not trade it. I buy it when I have money to do so.
The trick to casinos is to take as long as possible to loose 50$ and to drink $60 of comp beverages while you do it. It takes the sting out of loosing.
Free drinks! Yeah.
This market oughta give out barf bags, it's so volatile.
I think that being a good trader is more about admitting when you are wrong as soon as possible, and letting your right calls make you money for as long as possible.
Everybody is wrong often. It's just do you sell your 10 dollar stock at 9.75, or at 5 dollars when you're wrong?
Likewise, people are right on occasion. Do you sell your 5 dollar stock at 15, or at 6.50?
I think that those things have more to do with trading than being right or wrong in itself... just my two cents.
+2 cents....sh** I'll give you +2 doelarrs!!
What and who do about gold? Depends on the definition of "do".
I do buy regardless of price, that's what I do. I can't do anything else.
Double up and throw it at the fan. TDDHTF
I do too Rocky, whenever I can. I hold it in my hand - and it's not so much an investment as it is an insurance policy.
quite well researched and written. what about silver and platinum?
http://covert2.wordpress.com
Ask Dr. Leeb. He seems to have a nice ad at the top of the page, and ZH will get a bit o' revenue. I'm sure he'll shoot straight with you at no cost... 'cept some subscription fee or something.
Ask not! Just buy.
nice piece MHFT
Mr. Mad Hedge Fund Trader-
As I understand your portfolio views, from the beginning of this year you have been short Treasuries, long the Aussie dollar, and short the Japanese yen. I am a real hedge fund trader, and am up 20% on the year. I have gotten there by generally taken the exact opposite of the views summarized above. What I would like to know is how you have avoided bankruptcy with you portfolio of long Aussie, short yen, and short Treasuries.
My conclusion is you are not a real trader at all, as no real trader could in good conscience continue to prate on and on about views that would have ripped his face off had he actually had real money behind them.
so, that 20% up was in the cheese market???
so cheese - wheres your trades??? 20%?
most of the best hedge funds are down 5-10%; the very best are up only a few points
http://www.marketfolly.com/2010/06/hedge-fund-performance-numbers-may-2010.html
and you are up 20?
This is not junk. My theory is that MHFT is a politician (at heart) that writes these articles to "get a feel" for what "the masses" are thinking.
so, post your trades; up 20%?????
Ouch!
The Golden Rule_snip from Richard Russell_July 12 2010_
Frog Soup Gold and Diamonds
http://www.321gold.com/editorials/russell/russell071310.html
"Who has the gold makes the rules." And China is on a headlong path to accumulateas much gold as it can. China is now the world's largest producer
(miner) of gold, and all the gold mined in China must be sold
to the government. What in the world could the Chinese be planning?
Here's what I'm thinking. The yuan will become the world's most
wanted currency, heavily backed by gold and a stable government
plus the planet's biggest military. In due time, China will be
the new owner of the world's reserve currency.
But who is the government selling gold to? Chumbawamba, that's who.
They could just be selling the gold to make money now, and waiting to buy it back when it hits the 600s again when the economy improves.
LOL re selling to Chumba!
I doubt that China is selling much of their Gold.
Well, Chumba isn't buying much gold either... but he's their main customer... ;p
Research from the Bank Credit Analyst shows that (among other things), one of the signs of a potential decline in gold prices is an increase in real interest rates (indicative of declining inflation or expectations thereof). There is a strong negative correlation between the two. Until that happens....
But you have to take into account that there aren't enough dollars as it is to meet the demands of asset prices.
In this scenario, you can print much more dollars and still not cause inflation.
There are only two ways out of the current financial mess...
Deflation until the prices match the amount of dollars available to pay for assets.
Money printing until the amount of dollars available match the asset prices.
Neither one will cause inflation, because the inflation already occurred when the asset prices were run up earlier in the decade.
That's why the hyperinflationists have their ideas wrong.