It wasn’t too long ago that gold broke to new highs and even some folks on CNBC who used to bash gold every chance they could, were jumping on the gold bandwagon. But there has been a change in direction the last 60 days as gold is currently stuck in a cyclical bear rend. This current cyclical bear trend for gold has probably got people worried about their gold holdings and perhaps questioning why they bought gold to begin with. This article will explain what’s going on with gold and help investors understand the big picture.
The U.S. Dollar price of gold has dipped of late, although rebounding to $1,187 as I write this article. The following snapshot of yesterday’s price action is used as a reference point for this article.
Two months ago I was cautioning traders there could be one more attempt to buck people off the gold bull in Buy Gold Now or Wait? What Will Gold Do Next? and subsequently in Gold Will Struggle To Maintain Its Trend; Is Deflation a Concern?
It seems the bucking has come to fruition.
Looking at the 60 day gold chart below, you can see how gold is down priced in all the major currencies, the Euro, Yen, Pound, Franc and Canadian Dollar.
What’s interesting to note is that gold priced in Yen, Franc, Euro and Pound have been hit the hardest which is why the U.S. Dollar Index has fallen off its highs of late as seen in the following chart which shows it’s fall from just over 88.00 to its current level of just over 82.
So while gold has enjoyed a nice run up in price, it has now fallen a bit and investors are wondering whether it could fall in price further.
In reality, the only investors who are concerned about the price of gold falling are either traders, speculators who have leveraged a long position, or those who hold gold mining stocks in their portfolio.
Those who leveraged gold in the $1,240 range have seen their trade lose 4 or more times the fall in golds price. In other words, with gold presently trading at $1,180, they have not lost $60 an ounce, but if leveraged at 4 times their original investment, they have lost $240 an ounce. So a $100,000 investment leveraged at 4 times will have lost that investor, on paper, $19,332 of his original $100,000 investment. This becomes a concern the further the price of gold falls. That’s why buying gold on leverage, is a risky business and also why Monex has a “F” rating by the BBB as investors really didn’t know what they were getting in to.
Holders of physical gold meanwhile, are not concerned about any pullbacks in price. They know a fall in gold from the $1,200 range to the $900 range is no concern to them as eventually the price of gold will double or more from here. If anything, these holders of physical gold will do all they can to add to their position as the price of gold falls, thus getting a better overall price.
But an investment in gold isn’t supposed to be about making profit. It’s about insuring your portfolio against the fall of the U.S. Dollar. This doesn’t mean that speculators or traders can’t try and make a buck off of the current trends. There just needs to be a core position of gold established in one’s portfolio first.
So this begs the question, does one short gold?
A trader or even a holder of physical gold wanting to hedge their long position, may want to short gold and take advantage of market price action. A trader will always want to trade, but should a holder of physical gold try and hedge their long position by going short gold at the same time?
Recently, I replied to an article called “Shorting Gold” written by a trader, michaelarold from “Holistic Swing Trading. Michaelarold has a pretty good track record as highlighted below;
- Ranked #16 among over 20.000 investors for risk adjusted performance since inception (as of Dec 2009)
- Ranked #14 on list of most followed investors
- Positive return in every year since inception (2007)
While there may be better traders that’s not the point of critiquing his article. He looks like he’s done quite well and I am following him now because of this. However, his article deserves some analysis.
Michaelarold post the following disclaimer to his article;
I believe that Gold is ALWAYS (and has always been) a trade and not an investment. Two of the reasons being that Gold doesn’t pay dividends or generates earnings.
This is an underlying fundamental problem with most people in that they make a statement like this as a matter of fact; “gold is a trade, not an investment.” If this were the case, then I’m sure those in Iceland, Argentina, Brazil, the Philippines, Mexico, Germany, etc., and even the at times in the U.S., might beg to differ.
Gold is first and foremost, insurance for one’s portfolio against the fall of the countries currency. There is a reason why, as of this writing, gold is up in value by 170% versus all known currencies the last 10 years. Some countries, including the U.S., it’s up over 300%.
I replied to michaelarold’s shorting article and while agreeing with him on the deflation issue, said their might be a better way to play the trade where the risk vs. reward would be more in one’s favor.
Here is my reply to his “Shorting Gold” article;
You may be right
I may be crazy
But it just might be a lunatic you’re looking for
Turn out the light
Don’t try to save me
You may be wrong for all I know
But you may be right
Gold is up over 170% versus all the major currencies the last decade. Can there be short term pullbacks? Sure there can. “Traders” can take advantage of such (I’m not a Trader, but I do make comments for those who like to play the game).
The main philosophy for holding gold however is to counteract the fall in the U.S. dollar (for U.S. Citizens) portion of their portfolio as an asset class. It’s the only insurance that was able to buoy people’s portfolios the last few years.
I too believe we are in a deflationary trend at present. I’ve written several articles pertaining to it. I’m in the process of finishing a book that dedicates a chapter to the deflation debate with 100 footnotes. It’s not an easy subject to analyze, but we are clearly deflating.
The 2 Trillion stimulus did nothing to stimulate the economy. What will another 1.5 Trillion do? I don’t think much at all. So while we have monetary inflation, banks aren’t lending and credit contraction is dwarfing any stimulus.
The fact that gold has held its own during this shows the value people place on it as 1. a hedge against risk and 2. money or “real wealth” as opposed to an “illusion” as Trace Mayer puts it.
Traders can possibly play the risk vs. reward game with gold and profit. A smarter play may be to avoid stepping in front of the train and dollar cost average into a long position on any dips. I would think the risk vs. reward would be much more in their favor.
But the trader in me can also see some consolidating occurring and with the EURO bouncing, the psychology could change for awhile (I called off the “long gold in EUROs” trade when the EURO fell to 1.25.).
The underlying fundamentals of why one is in gold of course won’t change. Buyers of physical gold care not that it falls to below $1,000 an ounce on its way to $2,000 and higher.
(I see Patrick.net put my article right next to yours, so I thought I’d comment…hope you don’t mind…I realize a Trader likes to trade, ha….55% is better than Vegas! – but I do see some temporary calmness coming back to the stock market and this might bode well for your trade. I just wouldn’t get greedy….advice my father who was a trader at the CBOT always gave me. I have subscribed to your site.).
Personally, I don’t mind being speculative if one has the capital to do so. In fact, michaelarold is increasing his short position today. A good trader always adds to their winning positions and of course, more importantly, takes profit. I’ve decided to follow michaelarold and see if he can continue his trading success.
But the core of the portfolio that is anchored in gold and silver should not be speculated with. It’s a difference of philosophy that michaelarold and I have. That difference has been exploited most recently when Iceland saw their currency decline 75% in value in one year, and rather quickly. All it takes is for some “event” to occur and things can turn on a dime.
In michaelarold’s native currency, the Euro, that “event” can come from any of the PIIGS (Portugal, Italy, Ireland, Greece or Spain). The IMF can’t keep bailing out every country, at the U.S. taxpayer expense I might add.
While a short trader can lose all of their investment on such an event, a holder of physical gold never can. Trading gold short may make investors profit, but for me, the smarter trade is to run with the bulls and trade any dips long. But securing one’s portfolio with physical gold and silver needs to be done first.
So while gold and silver don’t pay dividends, or generate earnings, it has still outperformed every other “investment” the last 10 years running on a year over year basis. The fact that the U.S. government continues its madness of spending and wars unabated signifies this performance will continue despite any pullbacks in price.
Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534
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