Market Timing Brief for 8-23-2011

I wrote this article last night.  Today gold fell 3.51%.  You should know that high volatility moves in gold are often followed by a further move in the same direction.  Set your stops on trading positions.  And read this article to understand how the price of gold has been running up a bit too fast.

I think the following table is BIG news.  I smell a rat in the pricing of various items in it.  If we are buying gold and silver for protection against the great inflation, why is it that gold and silver are LEADING THE INFLATIONARY TREND!!!  My answer is below.

 First, look at this table:

GLD- Gold ETF, SLV= Silver ETF, Oil: WTI crude, CRB index = Commodity Research Bureau Index

This period amounts to about 1.66 years.  In that time, gold has gone up an astounding 60.43%.  Is that deserved?  Commodities represented by the CRB index are up only 21.51% in that period, so you can buy a lot more “stuff” than you can gold than you could before.  Oil did worse.  It’s only up 11.12% in that time.  And the dollar index is FLAT over that period, not down.

My suggestion is that either oil and commodities are a bargain or gold and silver are very overpriced.  Of interest is the fact that oil just rose back above the Feb. 2011 low again despite the announcement of the coming resolution of Libya.  The difference in “premium” cannot be explained by the carrying costs of commodities in that you have to keep rolling over futures contracts to maintain your positions.  Even GLD has a carrying cost of 0.4%.  More importantly, the percentage gains are too far off.

Even if the economy slows a bit and goes into a mild recession, do you really think the world is going to need less in the way of commodities?  I don’t.  So why would gold and silver run so far ahead of commodities in general and oil?  Fear and greed I believe are the answers.   These are the two energetic forces that destroy capital in the markets.

Now look at the Swiss Franc that has been under attack by the central bank of Switzerland to drive down its value, because it’s killing their economy.  It’s now “only” up 26.55% which roughly matches commodities, while again, gold and silver stand apart.  Too far apart for the long term.

Now you see why we’ll watch our stops at least on our trading positions.  Keeping a core gold position is OK, although some may differ with that.  You do need to be able to hold it “no matter what,” as gold has had major pullbacks over time hitting a low of around 252.60 in 2001, just 10 years ago.  Soon there will be a flip going on where real estate and the stock market will look much better than gold and silver.  How long will that be in coming?  It depends on how bad the world’s governments can make the next few weeks and years.  If the Euro collapses and the Euro Union is done away with, gold could be much closer to its inflation adjusted high of $2500 or so.  That despite the fact that $2500 may not be sustainable.

Remember that at the time of a crisis, everyone becomes more fearful than is actually warranted.  During the last gold spike, inflation was sky high (the Carter years), and it took Volcker to come in and raise rates to drive down inflationary pressures.  Now we’ve gone back to depressionary scares of unemployment (which is real for many of our citizens) and impending monetary disaster.  Remember that the dollar was devalued twice against gold and gold was seized back then.  It was a way for us to “take our medicine” in big swigs.  So yes, gold and silver can still go higher, but the risk of a large correction is growing.  And the government can intervene any time it wants, as we saw in the silver market correction when the CME increased margin requirements.  I’ve raised our trading stop again.

Here’s the key: the rise in gold is based on fear and I suppose you could argue “under ownership” in portfolios – the parabolic rise of late is based on greed. The weak hands are now going to be shaken out, as I said, unless Europe falls completely apart.   Which is exactly why we keep a core gold position.  For your trading position, time to set your stop.  There will be a time to rebuy gold.

As for stocks, to keep up with my weekly analysis, you can sign up here: Free SP500Tracker ™ Newsletter   I’ll have a new Tracker out this weekend.

This is the latest on gold, but be sure to stay up to date with gold via the GLDTracker ™ here: GLD Tracker™

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Standard Disclaimer: Remember, it’s your money and your decision as to how to invest it.
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