Why You Shouldn’t Expect $1,000 Gold Anytime Soon
Wednesday, July 1, 2009
Guest Editorial by Louis Basenese, Advisory Panelist, Investment U
Editor’s Note: Today, we welcome back good friend and colleague, Louis Basenese. In addition to being Oxford Club Senior Analyst, Lou is one of the editors at Investment U. Over the coming weeks, you’ll hear more from Lou and our other colleagues at IU, as we tap into our network of investment experts to bring you more diverse, actionable advice. Read on to get Lou’s latest take on the gold market - and a great, “double your money” way to play his theory that gold prices are set to retreat…
Martin Denholm, Managing Editor, Smart Profits Report
Gold Refuses To Respond To Global Upheaval
Just take a look at some of the major events over the past few months…
- The projected U.S. government budget deficit has ballooned to $1.75 billion.
- The Fed has printed money non-stop to fund a $1.15 trillion asset purchase program.
- Economic upheaval has continued, resulting in several major bankruptcies.
- Political unrest has erupted in Iran.
- North Korea has stepped up its nuclear defiance.
All these problems should have caused gold prices to climb. But the metal has struggled to even tread water. It’s down about 2% since February - the same time I suggested that the gold market looked “toppy”.
Despite this, though, the roar from gold bugs remains uninterrupted. They consider it heresy to suggest that commodities correct - especially their supreme yellow leader. But they do. And while some are calling for $1,000 gold, I expect a short-term correction will result in $800 first. Here are the most compelling reasons why…
Four Reasons Why Gold Is Headed For A Correction
#1: Technical Indicators Point To A Pullback:
Last week, gold hit $919 an ounce - its lowest price since mid May. And since it hit $1,033.90 last March, it’s struggled to gain momentum.
While I’ll concede that the long-term gold trend remains bullish, the short-term charts clearly point to a pullback. Most commodities experts agree that support rests around the $915 level - and we’re perilously close to that now. If we break through that price, look out below.
#2: Seasonal Factors:
Historically, gold prices weaken the most in June and July before spiking in late September, as jewelry demand increases ahead of the October-November festival and wedding season in India.
Gold’s sharp 5% selloff during June reinforces the trend that the market is beginning its traditional summer swoon. Gold bugs will refute seasonality this year by saying we’re not living in “normal” times - and are thus not headed for a “normal” summer. That’s nonsense. The market is littered with poorer souls that invested based on the mantra, “It will be different this time.”
#3: The Primary Catalyst For Investing In Gold - To Hedge Against Inflation - Is Missing:
We’re not anywhere near an inflationary environment. Instead, we’re staring down deflation.
Case in point: The latest consumer price index (CPI) and produce price index (PPI) readings came in sharply lower than forecasts. In fact, CPI dropped 1.3% in the year through May - the largest drop in 59 years.
Gold won’t make any meaningful and lasting moves higher until inflation rears its ugly head again. And although inevitable, it could be a year or two before that happens.
#4: Gold Speculation & Sentiment Remain At Fever-Pitch Levels:
Market-leading hedge fund managers remain heavily over-weighted to gold. Even the “taxicab drivers” of Wall Street - insurance companies - are getting into the game. For example, Northwestern Mutual Life Insurance Co. recently announced a $400 million stake in gold - its first ever in 52 years.
And in perhaps the biggest sign of a top, Germany plans to unveil gold vending machines in airports and train stations.
Bottom line: When everyone piles into one side of a trade, we know what happens. The market moves in the opposite direction.
The “Smart Money” Is Already Bracing For A Pullback
All we need for a gold correction to materialize is a slight shift in sentiment - not to neutral or negative… from wildly bullish to positive. And the latest evidence suggests that shift could be upon us.
In the last week, the total volume of U.S. gold futures and options fell 3.6%, according to the U.S. Commodities Futures Trading Commission. Hedge funds and large institutional speculators hit reverse even faster, with “net long” positions dropping 9%.
So how do we play this trend?
Double Your Money On A Gold Pullback
Of course, retail investors - always late to a reversal - are clueless. The SPDR Gold Shares ETF (NYSE: GLD) - the largest gold-holding trust fund and most common gold investment - ended Monday with 1,125 metric tons of gold, its third straight unchanged session./quotes/comstock/13*!gld/quotes/nls/gld
I urge you not to be as foolish.
Remember, no investment goes straight up or straight down. And when it comes to gold, sharp and violent corrections are typical. I’m convinced another reversal is afoot.
To profit from it, consider taking a small stake in the PowerShares DB Double Short Gold ETN (NYSE: DZZ). It will give you 200% the inverse move in gold prices.
Now, if you’re too chicken to be contrarian, or remain an unrepentant gold bug, that’s fine. Just hold off on adding to your gold stockpiles for now. A better buying opportunity is coming.
Good investing,
Louis Basenese
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2 Responses to “Why You Shouldn’t Expect $1,000 Gold Anytime Soon”
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The reason gold has not been able to increase in value lately is that the
U.S.Government,, in co-operation with one or two large banks, has been
manipulating the gold price!!!!! The banks sell gold short, thousands of
ounces, to suppress the price. When it gets low enough, they cover their
shorts. If they happen to lose money in this illegal activity, the U.S.Govern-
ment reimburses them. The magic point in the spot price seems to be
$940.00. An investigation into this activity has been requested, but the
investigators cannot seem to see the forest for the trees. It seems to me
all that has to be done is to check “who is selling”. The person who has
been watching and reporting the sales is TED BUTLER. He is trying very
hard to expose this manipulation.
Great report- I have been very concerned about the short and long term direction of gold. Now I have a much better feeling about investing in gold.