Take Profits on Gold

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Take Profits on Gold: The Media’s Dead Wrong About This Market

by Marc Lichtenfeld, Healthcare Expert
Wednesday, December 9, 2009: Issue #1154

Now is the time to take profits on gold – at least on a temporary basis.

I’m sure I’m going to hear it from the gold bugs now, but my colleague Karim Rahemtulla is right on the money with his assessment of gold.

There’s just too much evidence that gold is in the early stages of consolidation. Let me explain why…

Gold Prices Heading Down the Dot Com Path?

What supports my assertion that gold prices are headed lower in the near-term? Both behavioral and technical factors…

Behavioral

Think back to the dot com bubble in 1999 and 2000 when all anyone could talk about was the stock market. Today, we’ve got a similar situation in the gold market.

It’s not just financial/business shows talking about gold. Mainstream news shows are covering the topic, too. Typically, they rarely mention the financial markets (unless there’s a crisis). After all, there’s too much other valuable information to share with the American public, like the newest woman to say she slept with Tiger Woods or who Reese Witherspoon is dating.

When a financial instrument becomes the topic of mainstream news, that’s often a sign of the top.

Also consider that hedge fund manager John Paulson is making a huge bet on gold…

His firm, Paulson & Co., own nearly 43 million shares of gold miner AngloGold Ahsanti (NYSE: AU) – 12% of the company.
The firm also owns 31 million shares of Kinross Gold (NYSE: KGC) – 4% of the company.
Paulson is the largest owner of the gold ETF, SPDR Gold Shares (NYSE: GLD), boasting 31.5 million shares. The fund is a proxy for gold, as it tracks the price of the metal.

Paulson is so bullish on gold that he believes the metal is heading for $4,000 per ounce. And he’s starting a new gold fund in January. Remember, Paulson is the investor who correctly bet on the housing collapse and made billions.

However, as I told Mt. Vernon Research members last week, while Paulson’s housing trade was brilliant, very few investors who have made big calls like Paulson’s are able to do it again.

Still, Paulson is putting about $250 million of his own money into the fund. That smells a lot like a top for gold.

Now, onto the technicals…

Why Technical Analysis Points to a Drop for Gold Prices

John Roque, a technical analyst at WJB Capital Group, points out that gold has reached a +2 standard deviation above its 200-day moving average.

What does this mean?

200-Day Moving Average: This is simply the average price over the past 200 days.
Standard Deviation: If you don’t remember this from your statistics class, standard deviation is how much variation there is from the average (think of it as a bell curve).

A +1 standard deviation of any event occurs roughly 31% of time, while a +2 only happens 5% of the time (the flat line of the bell curve).

So in other words, a +2 standard deviation is a fairly extreme measurement. And in this case, it signals that gold is overbought.

But here’s the rub: Since 2006, gold has hit a +2 standard deviation on two other occasions – and the price fell by 22% and 29% respectively.

There’s another important indicator, too…

What the “Skew” and “Smart Money” Shows Us

Another indicator that shows gold is richly valued is the “skew” on options. Skew is simply the difference in volatility between call and put options that have the same strike price and expiration.

This week’s edition of Barron’s mentioned that the volatility of the SPDR Gold Shares ETF is higher for out-of-the-money puts than it is for calls. Just two months ago, it was the opposite. This suggests that people are buying more downside protection by way of put options than trying to take advantage of price appreciation with calls.

Action in the options market is often called the “smart money.” Investors will often look to the options market to get an idea of where the “smart money” thinks the market is going. In this case, the “smart money” is getting increasingly cautious on gold.

Since gold is still used for industrial purposes and jewelry, some gold bugs point to the supply-demand equation in support of higher prices. However, it’s important to note that the gold ETF is now the sixth-largest holder of physical gold. So if we see a gold selloff, the ETF could accelerate the decline with the disposal of its physical gold.

As Karim noted yesterday, gold prices shot up in a straight line over the course of a couple of months – from $1,000 per ounce to over $1,200. I expect to see a correction back down to at least $1,000 in the near future.

Hoping your longs go up and your shorts go down,

Marc Lichtenfeld

18 Responses to “Take Profits on Gold: The Media’s Dead Wrong About This Market”

Ronald Gates Says:
December 9th, 2009 at 12:05 pm
How do you see this affecting the price of silver?

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Investment U Reply:
December 9th, 2009 at 2:39 pm
Ronald,

Silver prices normally follow gold, as in when gold goes up, so does silver and when gold goes down, silver follows. However, right now, silver is much less overbought than gold is, which could affect any pullbacks in the near future. David Fessler recently wrote an article here in Investment U about why it’s time to invest in silver and he mentions the ratio’s between both precious metals.

Thank you,

Investment U

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Ryan Says:
December 9th, 2009 at 12:11 pm
Looking at a Daily chart, I show the gld peaking above the +1 lin. regression line of 115.5ish, but imo it never made it to the +2. I show the ‘mean’ to be at the 106 area and the -1 at the 96.51 area.

Not saying gold wasn’t overbought, but am not seeing where gld hit the +2 std. dev. at 126ish, either…….must be the difference in our settings.

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Nicholas Winton Says:
December 9th, 2009 at 12:20 pm
It’s true – gold prices might consolidate, but select groups of metal stocks will continue to move higher since they are still trading at a discount to metal prices, especially the small gold and silver juniors and exploration companies which hardly anyone else covers.

To learn more, please visit my blog where we forecast gold daily (for free!) and if you’re impressed, join our advisories where we recommend elite metal stocks for our paying subscribers: http://www.hedgehogtrader.com/blog.html

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Tom Luneburg Says:
December 9th, 2009 at 12:21 pm
Lou Basenese has sent his latest minion out to try and rescue the dead-wrong prediction he made a few months ago. I guess if you keep predicting the price of gold will drop as it rises for months on end, eventually you’ll be right.

Yes, gold could correct back to $1,000 on a technical basis. Maybe you’ll be right this time. But comparing it to the 2000 stock bubble is ridiculous. The market was at absurd valuations back then,while gold would have to rise to over $2,000 just to reach an equivalent inflation-adjusted value compared to its 1980 high.

It’s also evidence of your bias to be talking about Paulson being a “top-ticker” on gold. Of course, you would never say anything like that if he made a stock sector bet of the same amount. You’d be talking about what a brilliant investor he is, and what a great track record he has.

This is truly pathetic.

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john rountree Reply:
December 9th, 2009 at 11:38 pm
Amen! to what you just said. I doubt that Louis, as well as Karim, are selling their gold coins at this time. You know if Paulson is buying, he senses a temporary blip in the price of gold, and sees this as a buying opportunity because gold will shoot through the roof as stocks befin a correction, and Bernancke keeps on printing those devaluating dollars!

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Bryan Osborne Says:
December 9th, 2009 at 12:33 pm
And Kareem said to buy XLF calls in mid-2008. That was a wonderful idea, no?

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Glenn Millar Says:
December 9th, 2009 at 12:59 pm
Complete tripe! Gold’s not going up, printed money is declining in value due to QE. You can’t print more Gold and it’s a good hedge against the activities of rouge banks and gangster governments!

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Omega Reply:
March 8th, 2010 at 4:38 pm
Glenn Miller:

Granted, but the effect of inflation on gold is minimal at best. We had mega inflation during the 80s yet gold took a dive. The reason I believe in gold most of all is that its price will climb primarily because of the credit crunch (global). Of course the devaluation of all major currencies will have an impact also.

Cheers

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ralph Says:
December 9th, 2009 at 1:45 pm
I AGREE 100% BUT I GUESS IT DEPENDS IF GOLD IS MONEY AND THE AVAILABLE SUPPLY OF IT. YOU CAN GET LOTS OF PAPER DOLLARS BUT LOOK WHAT EVENTUALLY ARE WORTH.

CHEERS

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Wade Says:
December 9th, 2009 at 5:50 pm
Dear Mr. Lichtenfeld,

Gold opinions are a dime a dozen as I have been in the market since $400 gold.

Sure there will be sharp corrections, there always are during “bull” runs. But Like that of Mr. Basenese’s incorrect call from last winter, your inexperience is showing through like the proverbial light. I have followed Russell, Sinclair, Chapman, Turk, Morgan, Puplava and many others for the better part of a decade. I have lived through two commodity bull cycles and the first thing that stuck out immediately when opening your article had nothing to do with what you said! It said a thousand words and reassured me that the bull market was FAR from over. When yours and Mr. Basenese’s hairline recedes to that of a gold bug veteran’s, I will than take notice. (Not being biased here.)

Oh my, do I know the newsletter writers routine! Especially you young gentleman who are fresh out of the Keynesian school system. You join the ranks of all of the other money changers out there… If you get half your calls right you will grow your reader count. If you promote your winners enough and advertise your promo pieces you will herd the sheep. You believe that when you spot a tree limb, you can read the forest! It’s “time” that nurtures experience!

I’m not going to bother you with a lecture of 100 reasons why I think Gold is in a long term bull market, but I would like to leave you with handful of comments as to why your analysis is flawed. I would also like to recommended a few points of research that you should perform.

1. Study Austrian economics and the role gold has played in world history.

2. Study the world population and compare it to the US geological survey.

3. Compare the size of the gold and silver market to that of the S&P, the oil market, the retail sector, Microsoft or Exxon-mobile and tell me what you come up with.

4. Review usdebtclock.org

5. Forget about the gold sentiment that you see from the chair in the office for a moment. Get up and tell your Agora boss that you are going out to get your feet wet. Put on some blue jeans and hit the streets. First thing… a) Talk to 10 random people about gold and silver and let me know if they actually display excitement compared to that of the dot.com or 2005 real estate bubble? b) Take a stroll down to your local coin shop. Are their balloons and banners outside of the shop? Are their lines of people there to BUY (not sell) gold and silver? c) Attend a coin show or two. Baltimore hosts a major show 3 times a year right down the road from your office, check the crowds and talk to dealers while you are there.
d) Head back to the street and attempt to sell a gold eagle or maple leaf at face value or under spot and see what kind of response you get? (I guess you missed the California beach story?)

6. Go back and review what was being said two years ago when gold was heading from $650-$1,000. Ask Alex, Steve or Porter, they’ll tell you… Top callers all the way up (before, during and after violent bull bucking corrections as it climb the fearful wall of worry for 17+ years.)

7. Research what the Fed and other central banks are doing.go to sites like stlouisfed.org to verify your findings. Turn off your cable show and visit web sites like goldseek.com and get a broader view of what other experts have already researched from around the world. CNBC is clueless as to why India bought the IMF gold! They’re currently bullish for the wrong reasons.It’s the flavor of the day so to speak.

8. This isn’t all about Paulson, it’s about Einhorn, Tudor, foreign governments, JPM shorts and a lot more.

9. Most importantly!!! Gold is an international currency as it represents real money. The BRIC nations couldn’t give a rats @ss as to what CNBC thinks. This isn’t a local market bubble!!! Gold has recently broken out in many currencies.

10. A few freebies… Did you read the original “wizard of oz” book or watched “the secret of oz” documentary? Have you watched the “dollar bubble” documentary which is available on youtube? Did you read “creature from Jekyll Island”? Have you googled “federal reserve”? Do you understand how fiat money is created? And have you not heard the expression that “Gold is nobody else’s liability”?

You might be right for a week or a few months but your current analysis is like spitting in the wind. The poor Chinese man knows no chart but he knows “real” money when he sees it. Mr Lichtenfeld, there are a lot of things I don’t know and I am certainly no expert in the health care field but one thing I am well adversed in and that is Gold and Silver. I have walked a thousand miles in a gold bugs shoes since I bought my first modern day American Eagle for $274. I also have a library full of books and literature on the subject. I also collect and PSGS and NGC numismatics and have done so since they traded in their raw form of the late 1970’s.

My advice to you! Stick to what you know. Specialize in those fields that interest you the most and research it thoroughly before you speak or write about it. What’s the saying “You can’t con an old con” or something along those lines? If you want to trade, you will first need to read books form the greats like Graham and Livermore. If you had done this, you would realize that you need to leave emotions out of it and that its best not to form any factual analysis based on a cable news money show. They are nothing more than Roman bread and circus shows. They shout, cheer, lie and interrupt folks during broadcasts. They will change their minds a dozen times during a bull or bear market. They are just their to earn their salary’s and support the stations ratings.

I would suggest that if Healthcare is your specialty,you should stick with that. You can “sharpen the saw” on fine tuning your skills in that area. Leave the gold market to the experienced. I think its unfair when somebody as yourself gets to use the public as a sounding board when they don’t have all their ducks lined up. I would further recommend that you get your analysis out BEFORE a correction if you really want to assist people with better entry points. When I picked up your piece gold spot stood @ $1121 (silver spot @ $17.22)!

Are you starting to get my drift? Trust me my friend, I have seen and heard it all since 2001. Where were you, attending school? A new analyst will usually only jump in the water after they see it’s safe to get in. Do you really believe last Fridays unemployment numbers? Do you really think this weeks treasury auctions would go off without a hitch if gold was making new highs? Have you looked at golds price movement during past treasury auctions? Have you not read the prospectus on GLD and SLV? Have you seen not seen who the custodians are? Have you not realized that GLD and SLV are extended clearing houses for the COMEX? Have you not seen the ongoing disruptions with physical supply at the US Mint? Etc…

I too closed “many” of my ITM LEAP’s as Gold exceed $1200, but I am already reentering my trades. Did I sell my core physical or numismatics holdings? Of course not! Again, I suggest that you keep the fundamentals separate from T/A emotions when writing on the subject. Don’t wait so far into the correction before sending your article out. Sincere newsletter writers who are honestly familiar with the subject will forewarn their readership in advance, not use the posted timing as a benchmark for their portfolio tracking data. Which of these paths will you choose? Which audience are you addressing?

Most everyone (quick money) has already abandoned ship as most T/A indicators are already in oversold territory. And those who haven’t, are probably working and won’t read your article until tonight. Sure we could get another $100 drop on a correction, but it won’t be because gold is in a dotcom bubble. The upside reward heavily favors any long vs a further down tick. You also have another serious flaw that is quickly turning against you. Have you noticed how fast and steep the correction has been and such a short term time frame? THIS IS A CLASSIC BULL SHAKEOUT!!! Classic Bull markets have steep declines just as Bear markets have parabolic SHORT term rallies! The harder this falls the bigger the bounce and subsequent leg up. Take a closer look at past up legs within this 9 year old bull market. Always define the fundamental reason WHY gold has been going up before applying your T/A!

Had you posted this article prior to last Friday I would have given your T/A some credit, but your “gold heading down the dot com path” headline clearly shows that you are not seeing the “forest” amongst the trees!

You see… all of this had already been covered years ago. At $600, $800, $1,000 and now $1,200 owners of “sound” money were forewarned that analyst would come out of the wood works calling “tops.” Didn’t you know that gold was in a bubble 2 years ago? I thought bubble tops required a “public mania?” I brought the subject of gold to my car dealer, barber, seafood clerk and other after it had already hit $1150 and they looked at me as if I just flew in from Mars? Try it!

I remember a Steve & Porter piece from about 3 years ago where they had written about an Airport experience. Steve was attempting to call a short term top because a young salesman at a magazine stand had responded to their precious metals inquiry. He said he was accumulating Silver or something along those lines. Of course their theory was right, but you can’t base sentiment on just one person. Obviously it was a successful random hit which drew the wrong conclusions. We weren’t in the public mania stage back then, just as we aren’t now. On another note, you can’t base public sentiment on what a gold bug says as He already knows the score!

I have you down for an $1121 gold exit point (the time it reached this reader) !BOL! Please let the readers know when you plan to re-enter and don’t tell us after the market has moved up $30-$50 within a day! Eventually gold will reach a generational resting phase a good distance below a parabolic top, but this is not that time!

Thanks for being a contrarian on this bull market. It keeps the train fueled as the feared speculators and top callers exit the market.

In summary… you have the “cart before the horse.” It is the supply of fiat dollars that is growing, not available gold!

A must read! http://www.fleckensteincapital.com/special_features/gold/contrarian_dilemma.pdf

I didn’t mean to lecture, but I had some free time to share my thoughts and I decided to put it in writing.

Sincerely,

Wade

P.s. Did you know that Jon Nadler of Kitco has been telling people to sell gold since $500? Yet to this day he writes two page daily stories in which he makes arguments for lower prices? Is he just brain dead or is he simply creating a market that his dealer can buy from? He also turns down those who invite him to debates. Those who have followed his advice have paid a hefty price over the years.

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Jay Reply:
December 13th, 2009 at 6:32 pm
I am a novice in this, but I totally agree with Mr. Wade after closing my longs at 700 (twice in 3 -4 years) after hearing these top callers and still have not got a chance to buy it that low.

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Michael Says:
December 9th, 2009 at 9:14 pm
Certainly, when the last person with money to spare is convinced to buy gold then the last fool has been drawn into the market and the peak of the bull run has been reached. Then the fall!

Gold is given a value relative to money, but how? It is a special commodity because of its history of actually being money and then being a standard backup for money.

It seems to me that even though we dropped the gold standard and freed debt money from the constraints of gold, there is a tendency to return to using gold to value money, to balance the amount of money in circulation with gold bullion.
Am I wrong?

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AtlantaBubba Says:
December 9th, 2009 at 10:12 pm
Your comments on gold are only partly correct. The big banks are covering their shorts on gold and silver. They have to manipulate the price downward and then finish their dastardly deeds. Can you say JP Morgan?

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wayne shum Says:
December 10th, 2009 at 2:42 am
Nothing go up forever.All commodities do and will come back down one way or ther. Gold is no exception.

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Raphael Says:
December 10th, 2009 at 4:11 pm
Depending on the ratio you look at, you could make a case that the current dollar price of gold is either relatively fair or completely overvalued. In this post I make a case that the ratios in favor of the “fair price” view are the most sensible ones:

http://raphaelkahan.blogspot.com/2009/12/gold-is-this-bubble-yet.html

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Bob Says:
December 11th, 2009 at 1:37 am
Excellent article and that last comment is the most telling. Gold has had a parabolic rise from 1,000 over such a short time that it is well due for a pullback. However, over the longer term it is still looking good, so I will ride out the temporary storm and not cash in my chips just yet.

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A. Froehlich Says:
December 13th, 2009 at 11:32 am
I would submit that a “healthcare” expert should not be making public recomendations about the topping of gold. Comments from “Wade” have much more credibility. Watching CNBC and reading most newsletters is a waste. It’s primarily about selling advertising and mining for the uninitiated subscriber that motivates these opinions, IMHO.

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