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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.

Follow us on Twitter @SproutMoney

 

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Mon, 06/16/2014 - 08:34 | 4860761 Kina
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.

Mon, 06/16/2014 - 05:07 | 4860522 MarcusAurelius
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.

Mon, 06/16/2014 - 03:20 | 4860469 zebrasquid
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.

Sun, 06/15/2014 - 23:19 | 4860117 buckstopshere
buckstopshere's picture

Unlike many here on ZH I do not want the dollar to collapse. I get paid in dollars. Almost everyone gets paid in dollars. It would be foolish to demand a pay cut in real terms in order to preserve one's real savings. What would be best is if the inflationary trend or the money-printing halts and the debts are restructured. In case of an inflationary collapse, I have been investing mainly in hard assets and precious metals. It's my insurance. But as far as wishing for a collapse, that seems rather foolish.

Because elections are every two years for the House of Representatives, a need for revolution is greatly squashed. Educating the voters could bring about the change that many have been seeking here without dreaming of a violent rebellion or living off the fat of the land in some secluded mountains.

Tue, 06/17/2014 - 20:17 | 4867369 MeelionDollerBogus
MeelionDollerBogus's picture

hm.
I'd rather be paid in silver than in dollars.

Bring 'er all down, I say.

Mon, 06/16/2014 - 03:18 | 4860468 Global Observer
Global Observer's picture

Predicting and wishing for are two different things. Some believe the system is unsustainable and collapse is inevitable. If the collapse is inevitable, it is better for it to happen sooner than later because the damage during collapse and time required for recovery will be less.

But it is silly to wish for a collapse because of an expectation of the current investments rising in value. Collapse will cause a serious disruption to all systems, societal, political and economic. Except for a very few who can escape the consequences, everyone else will be negatively impacted by the disruptions whatever the value of their investments.

Tue, 06/17/2014 - 20:25 | 4867389 MeelionDollerBogus
MeelionDollerBogus's picture

This clearly violates the conventional wisdom that one should rip off a band-aid as slowly as possible.

Mon, 06/16/2014 - 01:45 | 4860405 Superdude
Superdude's picture

This is one of the best comments I have read on ZH. I agree. We need to quit with the collapse and violence talk, nobody wants to see that outcome.

Mon, 06/16/2014 - 01:56 | 4860416 chumbawamba
chumbawamba's picture

How about if everything explodes in a fiat engorged orgasmic climax?  That sounds quite nice, actually.

-Chumblez.

Mon, 06/16/2014 - 01:33 | 4860382 Skateboarder
Skateboarder's picture

Don't you want to be an inbred mountain hick? ;-)

Sun, 06/15/2014 - 22:48 | 4860032 Saltaire
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.

Mon, 06/16/2014 - 04:19 | 4860503 CHX
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.

Sun, 06/15/2014 - 22:26 | 4859958 AdvancingTime
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...

 

Sun, 06/15/2014 - 20:34 | 4859653 BringOnTheAsteroid
BringOnTheAsteroid's picture

I think Eric Sprott might have a case here.

Sun, 06/15/2014 - 19:33 | 4859488 f16hoser
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.

Sun, 06/15/2014 - 21:05 | 4859753 daedon
daedon's picture

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

Sun, 06/15/2014 - 22:18 | 4859375 honestann
honestann's picture

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

Sun, 06/15/2014 - 17:47 | 4859313 MontgomeryScott
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.

Sun, 06/15/2014 - 22:06 | 4859914 cpzimmon
cpzimmon's picture

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

Sun, 06/15/2014 - 17:16 | 4859253 bonin006
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)

 

Sun, 06/15/2014 - 17:10 | 4859237 ebworthen
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.

Sun, 06/15/2014 - 18:26 | 4859368 honestann
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.

Sun, 06/15/2014 - 18:22 | 4859365 quasimodo
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?

Sun, 06/15/2014 - 18:28 | 4859372 honestann
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.

Sun, 06/15/2014 - 18:47 | 4859402 buckstopshere
buckstopshere's picture

Retail investors, by and large, cannot demand delivery of physical gold as they generally must have 100,000 or more shares, such as with GLD, to ask for delivery. This number of shares would mean having an account worth over $1 million, which only large investors can have.

If they sell their paper gold and then buy coins and bars at a dealer, then the manipulation might come to a swift end.

Sun, 06/15/2014 - 19:28 | 4859478 honestann
honestann's picture

Yes indeed, and exactly my point.

Sun, 06/15/2014 - 20:41 | 4859673 BringOnTheAsteroid
BringOnTheAsteroid's picture

Noone can deny that the invention of the GLD and SLV ETF's weren't a brilliant maneuver in the quest to suppress the price of gold. So long as the demand is removed from the direct physical asset. 

Sun, 06/15/2014 - 21:43 | 4859853 honestann
honestann's picture

Absolutely correct.

GLD and SLV are diabolical scams!

Sun, 06/15/2014 - 17:10 | 4859234 craus
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.

Sun, 06/15/2014 - 17:08 | 4859224 buckstopshere
buckstopshere's picture

It would make more sense to place gold as the denominator since that is viewed as constant.

Plotting the monetary base to gold ratio, thus, would give you a dollar bubble of epic proportions (using the Federal Reserve Economic Data going as far back as 1918). This bubble was created in part by the clever gold price suppression over the past few decades using gold futures contracts and selling massive amounts of uncovered shorts (paper gold) in the early morning hours before trading officially begins for the day. They scare off a lot of investors.

This suppression scheme, however, is under threat by the large demand for the delivery of physical gold from the COMEX vaults.

Gold repatrition is gathering momentum and the move to other currencies in the form of bilateral trade agreements is happening at a brisk pace as well.

What drives the dollar up, however, are the investment opportunities in things like blue chip stocks and US real estate, all denominated in dollars. And, of course, the worldwide demand for oil as the Saudis take almost exclusively the US dollar for payment from all customers pumps up the purchasing power of the dollar.

Other countries that depend on the US for their defense still take dollars as they don't have much of a choice, especially non-nuclear powers.

Sun, 06/15/2014 - 19:12 | 4859446 BringOnTheAsteroid
BringOnTheAsteroid's picture

Who keeps taking the other side of the trade, this has never adequately been explained by anyone. They would have long run out of money. Sure, someone who has access to printed money is on the other side of the trade but why don't these losses show up?

Sun, 06/15/2014 - 19:34 | 4859490 honestann
honestann's picture

BECAUSE LOSSES ARE IMPOSSIBLE.

-----

When someone can create fiat, their cost is zero, and thus their losses are zero.  One of the most unmentioned (but obvious) fact of reality is... nobody monitors the creation of fiat.  Sure, that portion that buys US bonds is obvious, but NOBODY audits the fed, and NOBODY knows how much fiat, fake, fraud, fiction, fantasy, fractional-reserve debt-paper they create and spread around as necessary to manipulate the markets in the way they wish.

Which is why the ONLY way to stop their manipulation is:

#1:  NEVER invest in paper assets.

#2:  ALWAYS demand physical gold, silver, etc.

Sun, 06/15/2014 - 20:37 | 4859664 BringOnTheAsteroid
BringOnTheAsteroid's picture

So you think the Fed is taking the other side of these massive naked short positions in the futures gold market?

Surely this can't be difficult to prove?

Funny thing is, even if it is proved what difference does it make as it seems it will take violent revolution in the US to get rid of the Fed.

Mon, 06/16/2014 - 02:17 | 4859849 honestann
honestann's picture

Without an audit of the federal reserve, NOBODY, not even federal government, has any freaking idea of how much fiat they create.  And because they have dozens of equally opaque co-conspirator central banks all over the world, they can all hide their actions by several-level of transfers through those co-conspirators.

And yes, only an overwhelming demand for physical gold can defeat their manipulation... short of a complete extermination of predators-DBA-government, predators-DBA-large-corporations, predators-DBA-central-banks, and predators-DBA-large-financial-organizations.

Only when fiat is not accepted will the predators fail.  Even if all the predators were exterminated, more would rise to take their place as long as humans accept fiat.

-----

PS:  Hahahaha!  Guess what?  Not long after I posted this message, a new article was posted on ZH wherein the FT admits that central-banks have purchased $29,100,000,000,000 worth of stock in stock markets.

Now, where do you imagine that $29,100,000,000,000 came from?  That's 29 trillion bucks.

They won a poker game?

Against who?

Mon, 06/16/2014 - 05:59 | 4860548 Hobbleknee
Hobbleknee's picture

Honestann, where else can we follow your wisdom online?

Mon, 06/16/2014 - 22:05 | 4862676 honestann
honestann's picture

Nowhere.  I spend most of my time working on a large collaborative technology project, and ZH is pretty much my only waste of time.  That is, unless you count walking under the center of the Milky Way at night, or peering through my telescope.  But I consider those to be "therapy" (as in, "a break")).  I read and type very fast, so I don't spend nearly as much time writing as it may seem. 

Tue, 06/17/2014 - 09:00 | 4864465 Hobbleknee
Hobbleknee's picture

Ok. Thanks for the reply.

Mon, 06/16/2014 - 02:45 | 4860454 BringOnTheAsteroid
BringOnTheAsteroid's picture

But, but, but, that wouldn't be right, it wouldn't be fair, it'd be illegal. /sarc

Sun, 06/15/2014 - 15:36 | 4859026 Who was that ma...
Who was that masked man's picture

Yeah.  I'm short on gold.  

I wish I could buy more.

Sun, 06/15/2014 - 14:41 | 4858909 SeventhCereal
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.

Sun, 06/15/2014 - 13:37 | 4858783 Uncle Remus
Uncle Remus's picture

What - Sunday humor now?

Sun, 06/15/2014 - 13:10 | 4858728 kchrisc
kchrisc's picture

Shorting gold?!

Thanks for the laugh.

Sun, 06/15/2014 - 12:15 | 4858601 Bemused Observer
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...

Sun, 06/15/2014 - 12:09 | 4858582 goldpercent
goldpercent's picture

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

Sun, 06/15/2014 - 16:54 | 4859182 MontgomeryScott
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'.

Mon, 06/16/2014 - 01:24 | 4860371 goldpercent
Sun, 06/15/2014 - 19:37 | 4859498 honestann
honestann's picture

KEEP YOUR POWDER DRY.

KEEP YOUR PHYSICAL SAFE.

For practical purposes, those are synonyms.

Sun, 06/15/2014 - 12:08 | 4858577 Zeta Reticuli
Zeta Reticuli's picture

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

Sun, 06/15/2014 - 12:08 | 4858576 BeetleBailey
BeetleBailey's picture

I'm short....

of clown bucks to buy MOAR gold

Sun, 06/15/2014 - 11:54 | 4858542 cabtrom
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!

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