Gold Will Struggle To Maintain Its Trend; Is Deflation a Concern?

On May 12th 2010, I wrote the following where I predicted there would be “one more attempt to buck people off the gold bull.”

So What Phase of the Gold Bull Market Are We Presently In?

This is still the second and longest phase of the gold bull market. I believe there will be one more attempt to buck people off the gold bull, especially should the U.S. Dollar move higher. There are literally billions of dollars the Federal Reserve, in collusion with hedge funds and the wealthy elitist owners of corporations, can use to easily influence any market, especially one as small as gold.  That’s why the Federal Reserve wants to keep anyone from auditing them on monetary policy.

Gold could easily shoot up $50 from here or fall $50.  Holders of physical gold don’t care.  Holders of physical gold know gold will be at $2,000 and they will be smiling.  If gold fell to $900 from here, they won’t care and if anything, will find a way they can to buy more.

Dollar Cost Averaging into a position is the best way to play any run ups in the gold price like we’ve had.  In this sense, you hope the price of gold goes lower so you can buy it for less, knowing full well gold will be much higher in the years to come.

Points To Ponder – Gold vs Evil

I expect to see movements in gold of $50 and more either way in the months and years to come.  When we finally do hit the 3rd phase, the moves will be even greater.

There was a guy on CNBC yesterday who made a good point.  He was a new guy on Fast Money and I don’t remember his name, but he said, “if things are so bad, how come gold isn’t double the price it is today?”  The reason I believe is big money can keep gold down.

Proof can be found that it’s been going on for quite some time by looking no further than the Central Bank Agreements to sell gold.  Heck, those agreements had Switzerland sell gold the whole time it was moving higher.  How do the citizens of Switzerland feel about that?  The IMF has recently been selling gold too.

There is a lot of money working against gold and the battle the Federal Reserve will be waging behind the scenes is going to be fierce.  They would love to see the dollar steady while gold falls.  Gold is their enemy.  Gold is our truth.  Some might say it’s “Gold vs Evil.”

What we’ve seen occur since since that day when gold was trading at $1,246 an ounce, is gold fall to $1,182 as I write this article, a $64 decrease.  The bucking has begun.

I also called for traders to get out of the “buy gold in EUROs” trade locking in 30% profit.

Calling Off the EURO/Gold Trade

I’m officially calling off the EURO trade in gold (emphasis on “trade”).  As you can see in the chart below, the last 6 months have seen the price of gold traded in EUROs provide a return of just over 30%.  Anytime you make 30% in this short of time, it makes sense to lock in profit.  Some traders may wish to sell half and let the rest ride while holding a stop.  This can work out well too as the situation with other countries in the Eurozone is still as yet, unresolved.

My philosophy on trading gold mining stocks and the like is a conservative one.

Conservative Investing

I’m conservative when it comes to short term trading analysis.  If someone has made 10% on large investments in a short amount of time, then I’m ok with them selling at least half of their investment and locking in profit, and keeping a stop at the sell price on the other half.  With the remaining half, I recommend selling all the way up, always locking in more profit.

If someone has made over 30% on a smaller amount, them I’m ok with taking that kind of profit and leave some profit on the table.  My father, a retired commodities broker, used to always say that what kills a trader is “greed.”

Two Perspectives In Buying Gold

When it comes to buying gold, one can look at it from two perspectives.  They can buy the physical gold because of concern about a decline in the U.S. dollar, or they can buy the mining stocks or other paper gold investments hope of securing more profit.

The conservative approach is to buy physical gold.  This trade has returned a profit year over year for the last 10 years.  The riskier move is in buying the mining stocks and paper gold instruments. 2008 saw a large decrease in the price of mining shares despite gold being positive for the year.  The turtle wins over the hare.

What should you do?

It depends on your own situation, risk tolerance, goals etc.  This is the advice most financial advisors will throw at you.  My philosophy is you hold physical gold as insurance, and trade the mining stocks, locking in profit along the way, always buying the dips.

Right now is one of those times I would lock in profit in mining shares.  Why? Simply because the HUI did not break to a new all-time high while gold did.  The HUI did not confirm the gold break out. If stocks are supposed to be a leading indicator, then the non-confirmation of the gold break out by the HUI indicates to me this round of the party has run its course.

Is Good Timing Luck or the Result of Research

Good timing isn’t something one has a feel for, but evolves from an understanding of what’s going on in the economy and with the markets, not just in the U.S., but the rest of the world.

Most journalists you see on television only concentrate on gold priced in U.S. Dollars.  Doing so has cost them 30% profits in buying gold in EUROs the last 6 months while buying gold in U.S. Dollars would have returned  10%.  How many U.S. investors knew they could invest in gold by buying other currencies?  Did they learn any of this strategy by watching CNBC?  Not likely.

The only person I see mentioning this is Dennis Gartman.  Gartman has been long gold in a few currencies the last 6 months, but also called the trade off at one point earlier this year before getting back in.  See Dennis Gartman Flip Flopping On Gold and U.S. Dollar. I never called the trade off and the reasoning was based on the fundamentals of the EURO I analyzed back in November (approaching record highs) along with the turmoil occurring in Greece and the rest or the Eurozone.

Gartman made a good call a couple days ago, telling CNBC listeners that gold had topped off.  It is unclear whether he told his clients to get out of the trade or not as the next day he was on the air saying he was just “lucky” with that call.  He reiterated he was still in gold trades with the EURO and Pound so I’m not sure what he’s doing as I don’t pay $5,000 a year for his advice.

I don’t think it takes “luck” to make a good call, or $5,000 a year to solicit advice from someone when you can figure things out for yourself.  I think it takes some good economic research, looking at the fundamentals and market sentiment, and listening to your gut instincts if you’ve been analyzing the situation long enough.  Your gut instincts more than often are right.  But my gut instincts are heavily influenced by my research.  The result is good intuition and timing.

One must also realize they aren’t going to be 100% perfect in their timing and adjustments will need to be made.  External influences can have an effect on timing at any time.  Awareness of this is needed but one thing I know, one can’t go broke taking profit.  If dynamics change because of external influences, the trader needs to adjust.

Holders of Physical Gold

Don’t care about timing as much.  It’s more of a philosophy they are concerned with.  Holders of physical gold care not that it falls to $900 or lower on its way to $2,000 or higher.

U.S. Dollar Rising

I’ve been saying all along that gold the last 10 years trades inverse of the U.S. Dollar Index.  There will be times when this relationship wavers from the trend, like we’ve had the last few months.  This gold/U.S. Dollar Index trend is resuming in my opinion as the last few days we’ve seen gold fall and the dollar continue to rise.

The 10 year Treasuries that were just a 4% just a few weeks ago, have fallen to 3.23% today.  The Dollar is taking a breather today, but the trend has been up since it’s failure to break the March 2008 lows (non-confirmation).

As the money pours into Treasuries with a declining stock market, down 236 points to 10,208 today, and as the dollar rises, gold will struggle to maintain its upward trend.  A cyclical fall from here seems to be in the works.

While gold was perceived to be the safe haven during the EURO crash the past 6 months, along with the dollar, 70% of the world owns dollars and there’s more money going into them now than gold until things settle down.  The U.S., despite all the spending the government is doing (which will eventually result in a U.S. Dollar death march), is still strong enough to be perceived as a safe haven for the world.  One cannot discount this by claiming inflation is coming, inflation is coming ala Chicken little.

Inflation is coming, but not for awhile.  Deflation is king.  As real estate prices fall further, credit contraction is still the trend.   Enjoy the rising dollar while you can and stay tuned for what’s to come, and remember…in deflationary times, the purchasing power of gold increases.

More on this in the weeks to come.  For now, here’s a snapshot of what’s occurring, compliments of the work by Trace Meyer J.D.  It kind of puts things in perspective.