12 Reasons To Start Shorting Gold
http://www.investmentu.com/ppc/htmlreports/shorting_gold.html1. It's decidedly contrarian. If a contrarian investor is someone who deliberately decides to go against the prevailing wisdom of other investors, shorting gold certainly fits the bill. Right now, everyone else is buying gold, or at least recommending it. If you have any doubt we've reached such fever pitch levels, consider No. 2.
2. The infomercial factor. The best indicator of a turning point for any investment, in my experience, is infomercials. If an investment gets so popular it invades the pre-dawn hours with non-stop but-wait-there's-more offers, it's time to get out. And that's exactly what's happening now. So much so companies like Cash4Gold.com are invading primetime television. They even splurged for a Super Bowl ad spot. And they recruited washed-up celebrities Ed McMahon and M.C. Hammer to boot. In case you forgot, the Hammer filed bankruptcy in 1996. And Eddie boy almost lost his 7,000 square-foot, $6.5 million Beverly Hills pad to foreclosure. No offense, if you take investment cues from these two, you deserve to lose money.
3. There is always some truth in a rumor. Recent news reports suggested Germany, the world's second-largest holder of gold, was selling some from its vaults to trim its deficit. It turned out to be a rumor. But you gotta wonder if there's some truth behind it. After all, high gold prices would be an easy way to raise cash. In other words, the scenario is completely plausible. And if Germany's considering it, even remotely, so, too, are plenty of other deficit-ridden governments. It goes without saying that a government dumping supply on the market will send prices lower, quickly.
4. The gold-to-oil ratio is getting out of whack. Historically, an ounce of gold will buy you less than 14 barrels of oil. But with oil around $70 per barrel, an ounce of gold gets you almost 16 barrels - nearly 15% above the historical mean. If you believe in statistics, a reversion to the mean is imminent!
5. So is the gold-to-silver ratio. Historically, an ounce of gold will buy you 31 ounces of silver. But now the ratio stands at 66 - an unbelievable 113% above the historical mean. Here, too, a reversion to the mean is imminent. And I'd rather place my bets on a 53% decrease in the price of gold, than silver more than doubling to make it happen.
6. The HGNSI index is too high at 60.9%. For the past 25 years, Hulbert Financial Digest has tracked the average recommended gold market exposure among a subset of gold-timing newsletters. It usually fleshes out around 32.6%. But now it rests at 60.9%, a level it's only exceeded 13% of the time. The key - Hulbert found an inverse correlation exists between his proprietary index and the short-term market direction of gold. In other words, if the index is high, like now, gold is headed lower.
7. Trinkets drive demand, not governments or speculators. Nearly 75% of gold demand comes from the jewelry market. And if Indian brides balk at buying above $750 per ounce as the Bombay Bullion Association reports - India's gold imports cratered 81% in December - look out below. And don't be fooled into thinking investors (governments or speculators) will pick up the slack. As HSBC reports, rising demand from investors, particularly from ETFs, only offset half of the 33% decline in jewelry market demand since 2001.
8. What makes now "different?" If the global economic crisis keeps getting worse, as goldbugs like to point out, why hasn't gold tested last March's high of $1,030.80 per ounce? Or blown right by it? After all, gold is supposed to increase in value as economic conditions worsen. But it hasn't lived up to expectations, not one bit. And I don't think it ever will. Ultimately, when you factor in the massive amounts of stimulus being injected into the markets, on a global level, we're close to the worst of times... and the peak for gold.
9. Analysts love it. According to Bloomberg, 16 of 24 analysts surveyed by the London Bullion Market Association believe gold will reach a minimum of $1,032 per ounce this year. As we all know, analysts' track records are deplorable. Instead of just ignoring them, why not bet against them? The odds are definitely in our favor.
10. Hedge fund buying dried up. Institutional speculators (hedge funds) played a large part in gold's run-up. But 920 of them went Kaplooey last year, according to Hedge Fund Research, Inc. Not to mention, hundreds of others hemorrhaged capital as investors demanded their money back, while those left standing ratcheted down borrowing to close to nothing, according to Rasini & Co., a London-based investment adviser. In the end, gold prices will eventually reflect the absence of these former heavyweights.
11. Gold is schizophrenic and the wrong personality is in control. Multiple motivations exist to buy gold including the desire for a safe haven, currency, adornment, raw material, or inflation hedge. But much like Treasuries, the bulk of buyers come from the safe haven camp today. And once the economy shows any signs of perking up, we can expect these same investors to flee for more risky assets. And don't be so quick to rule out a second half recovery...
12. The Fed, the President, history and the Baltic Dry Index concur - the economy's on the mend. Despite dismal data, both the Fed and President Obama point to the current recession ending by later this year. Moreover, the average recession only lasts 14.4 months. So even if this one is longer than usual, we're still near the tail end of it. A fact underscored by the recent 61.4% rally in the Baltic Dry Index from its early December 2008 low. The index is the first pure indicator of an uptick in global activity. And once the economy gets back into gear, the Fed will act quickly to reign in the money supply and curb inflation.
Cleary the gold rush is on. But that's all the more reason to move in the opposite direction, against the herd. I realize this might be the most unpopular recommendation right now, but that means it could also be the most profitable.
And before you brandish me a fool for recommending shorting Treasuries and gold in the span of two months, here's the intersection. The driving force behind both assets in recent months has been safe haven buying. And it will remain the dominant variable in determining price in the months ahead. So when investors go back on the attack for more risky assets, prices for both assets will fall.
It's already happening for Treasuries. And I'm convinced gold is next.
When I first unveiled my ideas to start shorting gold it ignited a brouhaha on our Investment U message board.
That's because there's not much middle ground. Most investors are either fanatical or supremely skeptical.
A Morsel of Clarification on Shorting Gold
Let me start off with a morsel of clarification. I don't hate gold. I own it, or more accurately, an interest in gold via gold mining shares. And I believe a small allocation (5% to 7%) has a useful place in a well-diversified portfolio. Over the long haul, studies confirm it helps increase returns while minimizing risk. A benefit we can all agree is desirable.
But over the short-to-intermediate term - the next six to nine months - I think gold is a terrible investment. After breaching the $1,000 per ounce mark again (as I suggested would happen to subscribers) it is overdue for a retracement back to roughly $700 per ounce.
Long story short, I view shorting gold as a way for me to hedge my long-term holdings. For traders, it's a profit opportunity to consider. And whether we see eye to eye on this is irrelevant. Ultimately, the market will be the great arbiter of our differences.
For kicks though, let's address a few of the minor points of disagreement...
Shorting Gold is Not Really Contrarian
Some of you will likely suggest I'm being an "arbitrary" contrarian when I suggest it's time to start shorting gold. That no evidence, just a warm and fuzzy feeling, existed to back up my call.
Are you kidding?
The trash collector or the newspaper boy might not be investing in gold. But the rest of the lemmings certainly are...
- Investments in coins and bars increased 811% in the second quarter, according to the World Gold Council.
- Headlines abound in the mainstream press like this one from The Financial Times - "Gold primed to be ‘mania asset.'"
- Wannabe gold bugs are paying - willfully I might add - 20% premiums for coins and small bars. Forget buying gold, we should all become coin dealers!
- Investors - like teenage girls at New Kids on the Block concerts in the late 1980s - can't reach out and touch the SPDR Gold ETF (GLD) enough. It's now the second-largest ETF in the United States with a market cap of roughly $33 billion. With more than 1,000 metric tonnes of gold, speculators now control more gold than many industrialized nations. If that doesn't scream "out of whack" I don't know what does. Many of you respond by saying the investors here are institutions, so the inflows are not indicative of a top. You're wrong. Individuals, according to Morningstar, accounted for an estimated 60% to 70% of the investments in the last four years.
- The world's largest gold refinery is pumping gold coin blanks at a rate not seen in 23 years, according to Bloomberg.
- Reuters reports investment consultants are now advising pension funds and high-net worth clients to invest 5% to 7% percent allocation toward gold and gold stocks. After being an investment consultant to such clients, I can confirm such allocations are new. And will be followed, if they haven't been already.
- If you're a newsletter junkie, like myself, no doubt you also noticed the sudden explosion in "gold experts" that have some overlooked, stealth play on gold you need to consider. It's poised for 500% gains (or more), they say! All you have to do is read a 16-page teaser and sign-up for some newsletter. Marketers tap into what's hot, typically as a trend is cresting. Don't expect this time to be any different.
- From the Wall Street Journal, futures investors are taking delivery of gold at more than double recent levels (4.5% versus 2%). Paranoia anyone?
If the above isn't sufficient evidence to be a contrarian, I don't know what qualifies then.
Why Should I Listen to You, Lou?
If I don't have enough credentials to make such a claim, in your opinion, fine by me. Listen to someone more "qualified." Plenty of them exist that are also starting to question the merits of investing in gold, or at least acknowledge the mania...
...Newsletter god, Dennis Gartman says, "It's a little worrisome that so many people are piling in [to gold]." He expects a pullback, too. Just not as far as me.
...Peter Munk, founder of Barrick Gold, says he's never seen such strong interest in physical gold ownership.
..."This will all end badly, just like all other bubbles," predicts Leonard Kaplan, President of Prospector Asset Management, a commodities futures brokerage in Evanston, Ill.
..."Historically, when stocks begin to underperform gold, that's a sign that gold is running out of steam," according to Ray Hanson, a technical analyst at RBC.
My Biggest Concern
What really scares me is that some people take gold investing to an extreme. They actually believe in a government-orchestrated conspiracy to suppress prices.
It's pointless to engage in lengthy debates with conspiracy theorists. Logic means little. But let's suspend disbelief for a millisecond and say you're right, that the price of gold is being fixed.
Why in the world would you throw hard-earned money after the slim prospects of actually exposing and overturning the fix? Talk about a low probability of success.
But I digress. What's most troubling is many investors, including some in my industry, say gold is a forever position and they are committed to "a lifetime pattern of purchasing" and will never sell. Some of you even revealed 50% of your portfolio is invested in gold.
Here's the thing. I know that Christopher Columbus says, "Whoever possesses it [gold] is lord of all he wants. By means of gold one can even get souls into Paradise." But if financial Armageddon unfolds, which many gold bulls predict and in some sickly way wish for, gold will be priceless and worthless at the same time.
How so?
If world governments collapse, social order goes to heck, McDonald's won't magically be set-up to "make change" for your gold bars. ATMs won't spit out Krugerrands.
What's more, even if the price of gold tops, say $5,000 per ounce under such circumstances, what can you do about it? Cashing in on the gains means accepting the thing gold bugs completely despise, paper currency, in return. So indeed, it will be priceless, useless and worthless all at the same time.
Bottom line, the world isn't set up to handle gold as a currency. Not now. Not ever. It's merely an asset. And like all other assets, it's susceptible to bubbles.
If you're in the speculative mood, I recommend shorting gold in the coming months. Especially since, as the saying goes, "gold goes up on an escalator and comes down in an elevator."
The two easiest ways are to short the SPDR Gold Shares (NYSE: GLD) or, for some extra leverage, buy the PowerShares DB Gold Double Short (NYSE: DZZ).
At the very least, examine your reasons for owning gold. If you believe the end of capitalism is nigh and financial ruin is imminent, just remember you need gold to be liquid, acceptable and portable for your investment to be really worth anything.
All three are big question marks, convincing me John Maynard Keynes was more right than most want to admit. Outside of a small allocation for diversification purposes, gold is indeed a barbarous relic.
Good investing,
Lou Basenese
(明報)2009年6月20日 星期六 05:05
