Gold Buyer Beware (In the Near Term)

by | Oct 4, 2010 | Precious Metals | 11 comments

Do you LOVE America?


    It’s no secret that everyone and their uncle is talking about gold’s recent trajectory. It has, thus far, broken most mainstream economist and analysts’ forecast and blown past $1300 to new all time (nominal) highs.

    If one were a speculator or stock market trader playing gold’s short term moves, he or she would likely be on the long side of the trade with tight stops in case it were to reverse course.

    Since we prefer not to speculate with our wealth, our outlook for gold is and always has been to invest, not speculate, for the long term.

    But something just doesn’t seem right about precious metals and the US dollar in general.

    While gold has staged a meteoric rise in recent months, the US dollar has been getting hammered around the world. Perhaps the main reason for this is the Fed’s recent announcement of QE 2.0, which seems to have had a distinct impact on precious metals, and to some extent broader financial markets. The longer term impact of Fed monetary easing and currency debasement are clear – the prices of everything important are going to go higher over time.

    Now, don’t get us wrong, but maybe gold and silver are about to go the other way for a short period of time. What are we basing this on? A number of anecdotal facts – nothing technical, and nothing fundamental.

    Here are some thoughts one might consider before investing everything they have into gold in the current environment.

    October 4, 2010 CNN Business headlines with: Want to Catch Gold Fever? Try an ETF.

    In case you haven’t heard, gold has been on a record-breaking run recently. Want to get in on the action? Try an ETF.

    Instead of buying gold bars or coins and worrying about expensive security and storage issues, an increasing number of investors — both individual and institutional — are buying shares of gold-related exchange-traded funds, or ETFs.

    We’ve discussed the “gold bubble” in the past, and our view is that we have not yet reached bubble territory. But this doesn’t necessarily mean that a gold correction can’t happen. When CNN starts headlining articles about how to invest in gold, our ears perk up, because if anything is true about the mainstream media, it’s that they are usually a day late and a dollar short – especially when it comes to giving investment advice.

    October 4, 2010 Daily Finance Says: A Decoupled World Can Thrive Despite a Weaker U.S. Economy

    As Daily Finance reports, Goldman Sachs sees continuation of a weakening dollar:

    While some remain skeptical, even the decoupling proponents say that the rosier scenarios are all contingent on the the U.S. pain remaining contained. Based on its decoupling scenario, Goldman Sachs (GS) expects a weakening dollar, higher bond yields outside the U.S., and stronger emerging-market equities — unless American issues put the world’s financial markets on tilt again.

    Bloomberg, in a similar report, suggests that Goldman does not see a bubble in stock – or bonds:

    The risk to the decoupling wager is a repeat of 2008, when the U.S. property bubble burst and then morphed into a global credit and banking shock that ricocheted around the world. For now, Goldman Sachs’s index of U.S. financial conditions signals that bond and stock markets aren’t stressed by the U.S. outlook.

    While Goldman Sachs is a highly respected firm in financial circles, we’re not sure we believe them. Let’s remember that these are the same folks that packaged and resold mortgage backed securities to unsuspecting buyers by having those securities rated as AAA products (similar to top-tier US Treasuries), all the while they were short-selling the same market expecting to make a profit when the buyers of those securities went belly up.

    So no, we don’t really believe a word Goldman says, even though they may happen to be right. Will the dollar continue to decline? We’re not sure, but it seems to us that when the consensus tells us the dollar is going to decline, it does the exact opposite.

    All the mainstream business news outlets seem to be running the “decoupling” article in unison, suggesting that there may not necessarily be a decoupling in the near term. Does anyone really think that China, Brazil, Europe and the rest of the world will be immune to a re-collapse of the US economy and financial markets?

    Toby Connor of Gold Scents says Throw Those Oscillators Away when speculating in gold:

    If you didn’t buy the breakout you missed a huge portion of the C-wave as no corrective move retraced back to the breakout point.

    One of the biggest mistakes investors and traders make is using oscillators after a breakout has occurred. Oscillators are great tools if an asset is in a trading range. Once that trading range gets broken though one has to throw out their oscillators as they will cause you to miss huge portions if not all of the move.

    Now let me remind everyone that Bernanke clearly stated he would print money if the economy didn’t improve. We know there is no way the economy can improve because we still don’t have the next “new” industry to drive job creation.

    Folks this one is a no brainer. The Fed is going to print. That is going to cause asset inflation. The dollar is going to drop down into a yearly and three year cycle low. And the market is going to make Bernanke pay for his insane monetary policy with at least a mini-currency crisis in the dollar by next spring. And ultimately it is going to cause general inflation in all prices with the possible exception of real estate.

    Gold is likely now in a runaway move higher. Smart money is using any and all pullbacks to get in ahead of the inflationary storm that’s coming.

    Don’t get us wrong – we completely agree with Mr. Connor in his longer term assessment of gold. It is going higher. End of story.

    But where we may differ slightly is in the path it will take. Along with CNN and other mass media outlets running stories about jumping on the gold bandwagon and Goldman Sachs predicting further down moves in the dollar, the gold oscillators are suggesting that gold is in a temporary “bubble.”

    Is it possible that gold is currently overbought? We’re not suggesting you not trade / speculate in short-term gold moves if that’s your prerogative, but you might consider setting very tight trading stops, because this party could come to an end at any moment.

    Why would the party come to an end? We’ve maintained for quite some time that a crash in broader stocks markets around the world will lead to panic selling. And the fact that CNN and everyone else is recommending the purchase of paper gold as opposed to physical metals makes it much easier to offload assets onto the free market if the financial SHTF.

    If you have your 401K or IRA or whatever stock portfolio with a significant portion of your assets invested in the broader markets and prices start to collapse, you may very well just “sell everything” to get out of the markets and reassess.

    Really, gold shouldn’t go down because the global fundamentals in terms of ailing economies and government policy instability should continue to drive it up in the long term. Panic, however, is a strong enough reason to suspect gold may see a significant pull back in the event of price collapses in other asset classes.

    Newsweek says that Obama got “Rolled” by Wall Street:

    In an August 29, 2010 article, Newsweek suggests that President Obama is not completely to blame for the fact that banks aren’t lending and the economy is stagnating and not growing as originally planned when the mega-trillions in bailouts were committed:

    Barack Obama was “incredulous” at what he was hearing, said one of his top economic advisers. The president had spent his first year in office overseeing the biggest government bailout of the financial industry in American history. Together with Federal Reserve chairman Ben Bernanke, he had kept Wall Street afloat on a trillion-dollar tide of taxpayer money. But the banks were barely lending, and the economy was still mired in high unemployment. And now, in December 2009, the holiday news had started to filter out of the canyons of lower Manhattan: Wall Street’s year-end bonuses would actually be larger in 2009 than they had been in 2007, the year prior to the catastrophe. “Wait, let me get this straight,” Obama said at a White House meeting that December. “These guys are reserving record bonuses because they’re profitable, and they’re profitable only because we rescued them.” It was as if nothing had changed. Even after a Depression-size crash, the banks were not altering their behavior. The president was being perceived, more and more, as a man on the wrong side of an incendiary issue.

    The article goes on to discuss the policy missteps of the Obama administration in dealing with the financial crisis. To be fair, the we cannot blame the President for all of the problems plaguing this nation and our economy. The point, however, is that Newsweek and other media outlets are now starting to run articles distancing the President from any blame that may befall the U.S. economy in the future. Basically, it wasn’t the President’s fault as much as it was the banks, Congress and the policies of the Fed and Treasury department. This preemptive defense strategy suggests that something opposite of growth and a “return to boom times” is about to become a mainstream discussion topic.

    The fact is, President Obama did not get “rolled” by Wall Street. Following the financial crisis, the President knew exactly who he was dealing with. Any benefit to Wall Street in terms of bailouts and stimulus was with the full approval of the White House.

    Though nothing is certain, many different pieces seem to be lining up to suggest that all is not as it seems, especially in terms of stock markets, the economy and gold.

    To reiterate, we firmly believe that gold has a long way to go before it becomes a “bubble,” but caution our readers that short-term movements in gold could become extremely volatile and severe. We would not be at all surprised to see gold decline 10% to 20% in a matter of weeks or months, and than bounce back up to new highs again.

    At the same time, as Toby Connor and others suggests, gold may continue to move up, breaking new highs and eventually reaching bubble territory.

    So, the question is, should I buy gold today, or wait for it to crash again and then stock up?

    Looking back at Spring and Summer of 2008, we see similar action in gold. It rose to near all-time highs and then, just as quickly as it rose, it collapsed almost 30% during the panic selling of of September, October and November. Though history may not repeat exactly as it did before, we caution our readers that gold may experience a similar fate if stock markets were to crash again – though not even this is a given with the Fed’s desire to continue to debase the US dollar. Nonetheless, we should heed the warnings of 2008 and make sure that we do not over-commit our life savings to one asset class.

    Because nothing is certain, we recommend what we’ve always recommended: continue regularly purchasing the precious metal when your budget allows. This doesn’t mean buy all that you can today with all of the money you have in your 401K, but consider using the strategy of dollar-cost-averaging to minimize downside risk and build up a personal reserve.

    If, for example, one has $100,000 to invest in gold today, rather than buying a gold ETF in one shot, consider using 20% of that to buy gold today, and using the remaining 80% over the course of the next 11 months to slowly move into gold. This way, any downward price fluctuations would be averaged out over a one year period.

    This is not investment advice, but rather, an idea of how one might go about making a gold investment in today’s uncertain environment.

    Disclosure: Mac Slavo holds precious metals positions in GDX, GDXJ, Hecla Mining.


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      1. Good analysis Mac.  I agree.  But I must say that Hecla sucks big time. Well, in the past month it had done well (all of the silvers has done well) but Hecla is still near the bottom.  I hope it plays out well.

      2. The price of gold drop big time? I don’t think so, not in the rest of the world. I read a prominent peace in our national business rag saying it was time to buy as well. I saw one last year to, and a couple of years before that. The odd story doesn’t add up to public awareness.

        In 08 everything went down, except gold, it eked out a small gain for the year. Let the price go down $500 and everyone that thought they had missed the boat would camber on with a couple of ounces because what is 2 or 3 ounces for a little investor? Multiply that by many little investors and you have a big demand.

        But what is happening in America? It is collapsing, obviously. Is my home, Australia collapsing? Not yet, we don’t have the mass unemployment, the 5 years of falling home prices, the collapsing banks and the ludicrous debts the US has. So what does that mean? It means gold in aussie dollars (and in many other countries) has not risen much over the last couple of years. US dollar has weakened, ours has strengthened.

        What does that all mean? Sure the US$ could bounce back strong and probably will, a dozen more time before the next empire squashes it into obscurity. So sure the price of gold (in $US) may fall. But then it will rise again, and as it falls it will be just another buying opportunity because anyone in the US with half a Brain is getting very concerned for their capital. They are getting scared and scared people buy gold, they always have.

        For 10 solid years gold has risen steadily, and for 10 solid years experts have warned us to get out of gold. I’ll exit when Jim Rodgers exits thank you.

      3. I think, holding physical gold/silver, is the only way to go,  because by  holding your gold in hand,  you have  basically removed it from the FRN system.
        If  you own ETFs and gold mine stocks,  you are still exposed to the system.

        Many fear  that the FEDs will confiscate gold again.   I believe that,  if they do,  it will not be the coins they go after, but the gold in the ground…….mining stocks.    The FEDs will nationalize the gold and  silver mines.  Sure, you will be paid….but not with gold.

        It’s the old saying  “gold in hand, is worth a lot more than gold in the ground” or bank……..imho.

      4. Things are looking better, nothing to see here.  Buy ETF for an Extended Time F##4ed to become a speculator & start day trading.  Chicken noodle news says so. 

      5. In my mind, the only way to hold gold or silver is in your hand.  Holding some paper saying you own “x” amount of ounces of PM’s is a joke.  If something happens, that piece of paper will be good for wiping your butt and that’s about it.  Maybe, just maybe they will give you some worthless FRN’s if you go to “trade” it in.    I like going to the coin store and walking away with something real.  If I can’t afford a lot of silver I can buy a dollars worth if I want.  I don’t believe you can call your broker, interesting name broker, and order up a few dollars worth of silver stock or a tenth of an ounce of gold.   Maybe the rich dudes buy their PM’s this way but not us poor folk!  We don’t trust anyone!

      6. YES!  Please continue to talk gold down.  I haven’t bought enough of it yet!  Continue to worry about government seizure of gold and a new fiat currency supplanting all the shitty ones (which is to say, all of them).  Thanks!

      7. ETF’s? Just another scam, another paper trail so the government can more easily confiscate whatever you have left. Believe the government? They are really good at bait and switch.
        Paper gold? I will sell you pieces of paper that I say I have gold to back. You want to see the gold? Sorry, it isn’t available just now. Call back later.

      8. OK Mac, you did due diligence and covered your ass.
        Fair enough, as blogger in chief… there is a sort of responsibility in that, I acknowledge.

        So I’ll step in and elaborate.
        The western fiat money system (and ESPECIALLY the USD) is doomed. It’s living on borrowed time. Don’t get too enamored
        with those dead presidents. Likely they won’t be worth much shortly.

        What replaces it? Oh, now that’s the question on everyone’s mind. And in that uncertainly, Gold thrives. It has a track record as a store of value. However the enemies of gold are the banksters. Banksters who have taken control of government by virtue of  BUYING IT OFF.

        And then there’s the Fed… aka,  the banksters version of the anti christ. The banksters own the Fed and it HATES gold because gold is this disinfectant to their fungus of a monetary system.

        It’s a war, and no one knows how it will turn out.
        If the banksters win, then gold gets defeated and fiat retains the throne. If gold reigns, banksters will run like cockroaches at 2am when the kitchen light is turned on.

        Many think a show down is shaping up and this will get settled before long.

        we live in interesting times.

      9. Lets see now. Ten years ago the mantra was DOW 20K
        Lets see now. Ten years ago the mantra was DOT COM.
        Lets see now. Ten years ago the mantra was buy real estate.
        Lets see now. Ten years ago the mantra was BEANIE BABIES.
        Lets see now. Ten years ago the Y2K mantra was the world is ending.
        Lets see now. The 2012 end of the world mantra is growing.
        Lets see now. The current mantra is gold to 5000. Buy gold.Buy Silver.
        Lets see now. The year 2012 end of the world mantra is growing.
        Lets see now. Two thousand years ago the mantra was Jesus is returning soon.
        Lets see now. Niels Bohr, the famous physicist of his time towards the end of his life said this, ” Predictions, especially about the future, are difficult.”

      10. Comments….. Passing wealth from one generation to another is a good thing. Passing debt to the next generation is bad. Savers
        will never die, so value for savers is paramount. US$ is for trade,
        taxes and a small cushion. Silver is a ‘just in case’ reserve and
        gold is for savings; medium to long term savings.
        Look at Mr. Bean (the BOE comedian) and the shitstorm unfolding.
        With gold you stand a chance, with GOV promises, ANY GOV,
        you`re at risk.

        Be Loved.

      11. It’s a bubble I tellzya!


      1. Fiat Fear: Private Buyer Purchases A Ton of Gold Worth $42 Million and Hauls It To Private Location - [...] Gold Buyer Beware (In the Near Term) [...]

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