Should You Be Shorting Gold?

Sprout Money's picture

The recent price drop of gold is making investors nervous, that much is clear. People are tired of the negative price action and want to head for cover.

Although it is an understandable response, it is mostly an emotional one that does not have a lot in common with rational thinking.

By going short you want to protect a position, which you do when your expectations with regards to return are going down; when the potential upside is declining. The goal is, in any case, to protect your profit as much as possible with a short position.

Hedging or going short is NOT something you do after a large correction!

Nevertheless, the questions do arrive in our mailbox. People are asking us how they can short gold exactly at the time when it is pricing near a multi-year low.

Even more, gold is listed at half price in comparison to the period when the Fed’s balance sheet was less than half of the size it is now...

Gold vs Fed base

In other words, shorting gold today is not a very smart move…

Not only because the downside risk is decreasing every day, but because the upside potential is increasing every day. That is a deadly starting point for a short position.

Because shorting carries risks as well. In the first place, the possible (temporary) return is limited to 100%. For gold this is also practically impossible, because the price of gold will never be zero.

The potential loss you can make on a short position, in contrast, is unlimited. There is no limit to how high the price of a commodity can go. Secondly, you can only short gold through derivatives. That means in many cases that there is leverage involved.

The benefit of that is that returns would grow faster, but the disadvantage is that the losses will too. If you are not an expert in timing the purchase and sale of a short position then, you are most likely going to be in trouble. Even the pro’s admit that.

Whether shorting gold is smart? We do not think so. It could even do some serious damage to your portfolio.

Ultimately we understand that the price drop is a painful experience for gold investors, especially those who keep a close eye on the daily gold price.

Our advice: if you are sensitive to volatility, do not check the price daily.

Gold should be a long term investment / insurance within your portfolio, not a trade you enter for a few weeks or months to make a quick buck.

That is not the way you think about your house, for example, unless you call your real estate broker every week for a new valuation… Probably not.

Treat gold the same way. Do not look at the gold price daily, but consider gold to be part of your capital; an anchor of your wealth. It will save you from many sleepless nights.

Then there is the point of protection against a lower gold price, which is absurd in itself as well. If real estate drops 30% in value, people are lining up to buy. In gold’s case, however, everyone runs off. Strange, isn't it?!

We cannot emphasize it more: the only way to protect yourself from a lower gold price is by taking advantage of it.

If you know that the price of gold can never go down to zero, you should be ecstatic when the precious metal is for sale at wholesale prices. The only thing you need to make sure then, is that you have enough ‘paper money’ to exchange for gold.

Trust us, investing in gold requires a different mindset. The same kind you have when buying real estate, land, or art.

And if you then are really interested to take advantage of gold’s low valuation, know that we are focused on investing in the Best Selection of Gold Mining Stocks. That is where the true value is hidden in the gold market.

Do not be swayed by volatility or the negative headlines in the media. Gold and gold mining stocks have always been the right choice. In a few years, in a new monetary era, your buying power will be heard!

>>> More info on the future of the gold price!

Sprout Money offers a fresh look at investing. We analyze long lasting cycles, coupled with a collection of strategic investments and concrete tips for different types of assets. The methods and strategies from Sprout Money are transformed into the Gold & Silver Report and the Technology Report.

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Kina's picture

The month to month price of paper gold entirely a function of the will of the manipulators. Not related to supply and demand and so forth.

 

Wanna know if it is worth shorting or going long...go speak to those goons and ask them what they going to be doing next week.

 

Well going long is fine, its like betting on gravity, it aint going anywhere, and beats everybody in the end.

MarcusAurelius's picture

To the person at the top post, the paper gold market is just that. A paper based gold market made up of traders. It has nothing at all to do with the physical market other than a form of pricing. Larry may have called the gold market ralley NOW but he was wrong at the turn at 1180, and he did not know what to make of the market until the sell off had washed and rinsed the weak longs. I called the 1220 mark bottom and was in "short" within one day of the 1392 top that most bulls got sick of watching from the sidelines and jumped in only to get pounded. I called the short break out first to get rid of the longs that were building and to stab the short sellers and I called the long about a week ago knowing full well that the market had very few longs left who weren't fully frustrated and pissed. The market should move to the 1305 area and somewhere beyond to get the short stops and then I will reassess then. Yes, I have all the proof of this in live trading. Not some BS, "things are looking good" type of call.

zebrasquid's picture

FWIW, Larry Edelson, a long time observer of gold market, and the only gold guru I know who correctly called for a bear market in gold in 2011 --after being bullish since early 2000s -turned bullish again...looking for $5k to $8k per ounce within 3 years or so...because of safe haven buying due to war cycles coming.

Saltaire's picture

I have to agree gold is worth much more than its current price in dollars, however, at this point with so much world turmoil the fear of losing grip will cause an ever greater leasing to the bullion banks. This can continue for a very long time. My suspicion is, the recent strength in gold has been orchestrated to soften up the market in preparation of a big smack down with the intention of killing the gold market for a long time.

CHX's picture

"with the intention of killing the gold market for a long time". Not gonna happen, I'm affraid. To do that, they'd need to have possession of the physical metal, which they DO NOT. Physical gold is and was being accumulated aggressively over the last 12+ months, and producers have (mostly) to sell at loss or are just breaking even. So no, this smells more of a bottom. Everybody seems bearish, the physical market is tight (GOFO was negative a lot lately, and is still just barely positive), producers lose money, and the metal is accumulated. If a smack down is to occur, it will be very short lived. Only little more money needs to go into physical and the market will break with some sort of default (eg. CONeX only settling contracts in fiat).  As for the "recent strength" - you ain't seen nothin' yet, so hold on to your golden hats.

AdvancingTime's picture

I would not short gold, but because of the uncertainty in today's market and the direction events might take the subject of "value and worth" continues to garner a fair amount of interest and remains relevant. History is chucked full of  distorted markets, debts unpaid, promises unfilled, and bubbles.

These "interesting times" play havoc with the value of things and what they are worth. Like some of the cruel games children play you don't want to find yourself without a chair or holding the "hot potato" when the game ends. The article below delves into what things are worth.

http://brucewilds.blogspot.com/2014/05/value-and-worth-constantly-change...

 

BringOnTheAsteroid's picture

I think Eric Sprott might have a case here.

f16hoser's picture

If you're shorting Gold, your a "Dumb Ass!" Simple really. If you're in your 20's, 30's and low 40's; you need to be accumulating silver/Gold Bullion. Especially if you have children/Heirs.

daedon's picture

Owning gold was illegal for what, 40 years, only the ruling families can afford that kind of game.

honestann's picture

Gold will probably cost at least $1600/oz by 20150131.

MontgomeryScott's picture

'GLD' and 'SLV' short or long positions (not the REAL THING, mind you) allow plebes to play casino games. You might 'win' and you might 'lose' but the question is:

WHO runs the HOUSE?

Gee, I dunno.

http://www.zerohedge.com/news/2014-06-03/gold-price-manipulation-was-rou...

http://www.bloomberg.com/news/2014-02-28/gold-fix-study-shows-signs-of-d...

http://www.reuters.com/article/2014/06/10/uk-gold-fix-lme-idUSKBN0EL2HB2...

Aw, SHIT.

Alex Jones picked up on it. He MUST be a 'domestic terrorist'.

http://www.infowars.com/the-hows-and-whys-of-gold-price-manipulation/

 

HOW DARE YOU?

http://www.youtube.com/watch?v=viq_qKv3Pk4

(Scripted APPLAUSE, and the attacks of the power Elite, are still in force)

SOON. Maybe not now, but SOON.

cpzimmon's picture

I'd like to know what the fuck you're talking about. Why the cryptology?

bonin006's picture

"Trust us" - Sprout Money

"If a man tells you you can trust him, you can't trust him" - mother's advice to daughter in the movie "Blaze"

I have found that advice to be very accuate (but I still would not advise shorting gold)

 

ebworthen's picture

"Even more, gold is listed at half price in comparison to the period when the Fed’s balance sheet was less than half of the size it is now..."

Ah, so we should be at $2,600/troy ounce at the least.

honestann's picture

His point is... $2600 is the OTHER EXTREME of the range, not necessarily the appropriate or likely price in the short term.

quasimodo's picture

The good news is the manipulation will soon be ending with all the exposure we have had on this subject lately.

Right?

honestann's picture

Exposure has little if anything to do with ending manipulation.  The only force that will end manipulation is... when many folks who hold paper gold positions say "send me my freaking physical gold".  THAT would end the manipulation in one day, if you could get most holders of paper gold positions to demand [their] physical.

craus's picture

This is bad timing for this article. Investors should be going long on gold this summer at it's expected low point.

Who was that masked man's picture

Yeah.  I'm short on gold.  

I wish I could buy more.

SeventhCereal's picture

Short term trading in gold has been very profitable.  It's gonna take a long time for this thing to turn around, plenty of reaction-time to adjust short-biased trading strategies.  There are better ways to make money than to speculate on long-term gold prices.  The best trader makes money either way.

Uncle Remus's picture

What - Sunday humor now?

kchrisc's picture

Shorting gold?!

Thanks for the laugh.

Bemused Observer's picture

At this point, it is too late to educate people. Let the gamblers keep gambling, it doesn't matter. Artificial price suppression can't work forever, and when it stops working, those left holding gold will be very happy campers.
Patience, young Jedis, your day IS coming...

goldpercent's picture

Looking awfully uncomfortable with her gold shorts. Probably a bad idea.

MontgomeryScott's picture

On August 10, 2011, I was on Max Keiser's website, and he had posted a story called 'Silver Shorts'. I saved the pic included (the whole link was a pic of a girl wearing silver-metallic panties, her legs disappearing in a bed of white feathers). I don't know how to post the pic over here, otherwise I would.

The prices are being artificially manipulated; in order that those that hold physical will sell what they have. call it a 'fire sale'.

honestann's picture

KEEP YOUR POWDER DRY.

KEEP YOUR PHYSICAL SAFE.

For practical purposes, those are synonyms.

Zeta Reticuli's picture

I thought it said "snort", not "short". Never mind.

BeetleBailey's picture

I'm short....

of clown bucks to buy MOAR gold

cabtrom's picture

Attention, the government can short gold because they have have all the guns and oil. They don't give one shit about a hunk of gold tin. Try and buy a gallon of gas with it at your local gas station. The pimpled face teenager running the till would look at you like YOUR some kind of idiot trying to pay for 10 dollars of gas with a " stupid gold coin" he'd tell you sorry sir I need "real" money. This is the problem we are outnumbered by morons so just accept it and show me a story about candy mountain!

MeelionDollerBogus's picture

Nope.
The day is quickly coming when silver coins, packs of cigarettes & bottles of whiskey will be gladly accepted as payment in stores and dollars will be laughed at.

Do you pretend it's never happened before? It's happened before many times and now it's America's turn to feel the same.

MontgomeryScott's picture

I have a gun that looks very similar to the one in your avatar. Mine's bigger, though. It's like an Uzi, but fires .45, and try to carry 30 rounds of THAT around...

Unfortunately, it's heavy, hard to use, and quite innacurate when called upon to target particular enemies (as well as historically undependable).

The Messican and the Nigger gangs like to call it a 'street-sweeper', but it usually ends up killing innocent by-standers (such as sleeping children) as they try to enforce their control of the drug cartel/government/CIA sponsored terrorism memes.

You DO realize, of course, that the .22 caliber is the choice of assasins?

I carry in my wallet a one-ounce silver coin. Sometimes, I pull it out when paying for my gasoline (depending upon the demeanor of the clerk), and there are a lot of 'pimply-faced' young clerks whose eyes light up, when I ask them about real money as I transact my purchase in fiat currency and show them my coin, which is worth; what, 19 USFEDs or so?

NO, the 'government' DOES NOT hold all the guns and the oil (AND, they do NOT hold any gold or silver). If they DID, they would NOT be trying to get YOURS.

Silly human....

Haager's picture

Buy gold, short the paper. Worked well so far.

MontgomeryScott's picture

BUT... BUT...

If I have to take a shit, it's difficult if I run out of paper, and trying to wipe my ass with metal is SO SCRATCHY! Couldn't you just compromise, and put the paper on a roll, or something?

AAH. THANKS, HELICOPTER BEN!

disabledvet's picture

Of you hedged by buying nickel you've covered your losses and then some.

Perhaps the better question is "why is Government shorting gold?"
That's the height of insanity!

With interest rates this slow...yet the TED spread still very healthy...the Government is simply being suicidal by not putting itself back on a gold standard.

That secures their borrowing authority a hell of a lot better than trying to "manage" interest rates.

Has the added value of putting a bid (and then some) in your currency.

Winston Churchill's picture

That would require having some gold.

After 30 years of suppressing gold via leasing it, the

cupboard is bare.

CHX's picture

Since they kept the physical market somewhat together, up 'till now, the actually must have had "some gold", even if some or all of it is/was not theirs (ask Germany). So the question becomes, how much physical gold have they left (if any) to continue the charade? When they run out, it'll be another Nixon-August-1971-event, and then things could go so quick that the true shorts (the ones that sold all the physical gold) might be in dire straits. That reminds me of... paper gold is a form of alchemy...

http://www.youtube.com/watch?v=Ikea2kYK4ug

 

Hobbleknee's picture

Why do they have to have some gold? Nobody has peeked inside Ft Knox since 1953. Until an unbiased, third party performs an audit, then can say whatever they want.

GetZeeGold's picture

 

 

We stole Germany's gold and sold it into the market to drive gold prices down......you can only do that once.

 

At some point I think they're gonna want it back.