Anyone who has followed my writings knows how bullish I am on gold. I am still long term bullish for a multitude of reasons that you can read by clicking on the “gold” tab at the top of my blog. For those who hold physical gold you need not worry that gold could fall to $800 an ounce or lower on its way to $2,000 an ounce in the next couple of years. To those I don’t write this article.
But to the short term traders I am in the camp of gold topping off here. I’d rather be early to the call than late. Price of gold right now is hovering around $1,058. Below is my reasoning…
WHY GOLD COULD BE TOPPING
One of my first indicators of gold topping in the short term is that CNBC is now bullish on gold. They still mock it like Melissa Lee did yesterday in saying that “you can’t eat it,” but overall, even the bald guy with the pony tail didn’t take his usual stab at knocking gold. Mark Haynes was even saying that “somewhere out there, Peter Schiff is smiling.”
Well, Peter Schiff and his clients are definitely smiling at present, but Peter recommends a long term approach to investing and doesn’t advise clients to play short term trends. In the long term his clients will do fine, but in the short term, as what happened last year to not just Peter’s clients, but the clients of most financial advisors in America who believe that “buy and hold” is the best way to invest, was a temporary bushwhacking as the overall stock market took a hit out of most everyone’s portfolios.
THE DOLLAR INDEX
The dollar index broke below 76 by a little this morning and is presently hovering around 75.80. This break below 76 is the main catalyst for today’s gold price movement higher.
Yet looking at the charts, gold has broken out to new highs without the dollar index breaking to new lows.
If you follow Dow Theory and the need for one index, the DOW to confirm the Transports, I believe we need to see the same thing occur with gold before going “all-in.”
Gold has broken to a new high, but the dollar index has not confirmed. Until the dollar index breaks below its March 2008 low of 72, I’d be cautious with being long gold mining stocks at the present time.
The crowd over at Lew Rockwell have come out today with their usual (and correct) bullish stance on gold, causes of the current dollar crisis and other critics of the U.S. dollar. But they don’t do much short term prognostications. Many people have gone broke being right in the long term, but not being able to survive the short term. But at least the Austrians challenge the establishment even if their challenges are brushed aside or met with laughter. In the end, the Austrians will be proven right. In the end, gold will shine brightly, although we won’t be happy about the economic effects of such (hence my writing the book “Fed Up!” to help warn people of what is to come).
Mish Shedlock does a good job of looking at the short term. In his article written today he takes a look at the dollar from a global perspective and sees more problems in other currencies than at present with the dollar.
Most are not aware of the problems in China, Japan, or Europe. However, the problems in the US are universally well understood. Indeed all eyes are on the dollar and everyone is talking about deficits, monetary printing, and especially unfunded liabilities even though the latter is tomorrow’s problem, not today’s.
Watched Pot Theory Revisited
A watched pot may boil, but it’s not likely to explode, especially when everyone watching the pot expects an explosion any second.
Indeed, it would be fitting if the Ridiculous Hype Over Secret Oil Meetings, helped form a bottom on the US dollar.
Yet, it’s easy to see that a financial crisis is brewing.
Somewhere, something is going to blow sky high, but from where I sit, it’s as likely to be in the Yen, the Swiss Franc, the British Pound, or something no one is watching at all as opposed to the US dollar specifically.
Indeed, even Dennis Gartman was on CNBC yesterday saying he was long gold in the British Pound, not in dollars.
ELLIOT WAVE ANALYSIS
Ron Rosen has been negative on gold based on his Market Timing Letter. He has missed some of the current run up in gold, but his analysis seems to fit “what’s happening now” from an Elliot Wave perspective.
From his letter today:
“It is my contention that gold bullion is currently undergoing a Major Wave Four expanded flat correction. The correction will probably bottom somewhat below the logarithmic trend line. That should eliminate most gold bulls.”
WHAT TO DO NOW
If you’re thinking about getting into gold, I’d wait for a pullback. If you’re long gold mining stocks, I’d be taking some profit.
I’d buy some out of money PUTS on GLD and other gold and silver mining stocks (my assumption is you have been following gold stocks to know which ones). This advice is not for novice traders. Consult your financial advisor and work out a strategy that best suits your risk tolerance.
How far out of money you want to go is up to you. But if the price is right, the risk is small and reward is great.
I know it goes against all conventional thinking and against everything I say about gold (long term), but my brain is trained to look at the opposite of things and if CNBC and everyone else is bullish, I’m looking for the a dip in the price of gold which we all know eventually comes.
Yes there is a risk, but the reward can be quite good if correct. If gold falls to $900 and then possibly $800 or even lower, you’ll see some nice profit.
But once this fall in the price of gold occurs, buckle up for the trade of the century as gold will fly like you’ve never seen before! This will be the move that will end the 2nd stage of the gold bull market and we will have entered the third “euphoria” stage.
Lastly, if you follow the advice in my book, “Buy Gold Safely,” you know what I recommend and you’re not taking any risk.
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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