Gold’s loss of momentum in the past months has predictably brought out calls to short gold [Read: It’s Time to Seriously Consider SHORTING Gold – Here’s Why]. [This article offers] a brief guide to whether you should consider or ignore these [suggestions]. Words: 1184; Charts: 1
So says Cliff Wachtel in edited excerpts from his original article* posted on seeking Alpha under the title The Only Reason To Short Gold.
Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!), may have further edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) the article below for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.
Wachtel goes on to say, in part:
FIRST UNDERSTAND WHAT GOLD IS AND WHAT IT ISN’T
…There is widespread confusion about what really drives gold and what kind of asset it really is. Below is the short version:
- Gold is neither a risk asset (an asset that rises in times of optimism about growth like stocks) nor safe haven asset (an asset that rises in times of the opposite sentiment). Rather it is primarily a currency hedge, which rises in times of concern about the long term value of the most widely held currencies like the USD and the EUR.
- A currency hedge is not the same thing as an inflation hedge (which gold is not). The concepts are related, and inflation is correlated to currency depreciation, but the two concepts are not the same. For example, over the past decade in which gold has rallied to new highs, inflation in the U.S. has been relatively low in the past decade, but the USD has steadily lost value relative to most major currencies.
- There are relatively brief periods when this rule doesn’t hold. For example in times of great market panic it tends to get dumped as markets flee into safe haven currencies.
DEMAND FOR GOLD AS CURRENCY HEDGE
Given the above understanding of gold, you want to be overall long gold when the currency to which most of your wealth is linked is at risk of debasement. Again, this article is meant to be a quick guide, so let’s just briefly consider the broad outlines of that risk.
The policy makers behind the USD and EUR, the two most widely held currencies, have indicated, in both word and deed, that they are ready to print money in virtually unlimited quantities for the foreseeable future in order to prevent recession or worse. They have not made material progress in curing the root causes of their economic woes, and so it’s reasonable to expect them to continue undermining these currencies. The solutions are known but politically impossible as long as the elected leaders continue to place a higher priority on retaining power than on imposing solutions that would be painful enough to get them voted out of office. [Read: World’s Largest Economies Have NO Choice But to Engage in Massive Money Printing – Here’s Why]
Policy makers behind the JPY and GBP are heading in the same direction for essentially the same reasons. They can’t cut back spending without imposing so much pain on their voters that alternatives to money printing are politically impossible at this time.
It’s not surprising then, that those in charge of the leading export economies and sovereign wealth funds are moving out of these currencies as quickly and quietly as they can (admittedly not so quickly or quietly given their size and need to avoid undermining both the value of their remaining holdings and exports).
Given that the above economies have yet to make meaningful progress of to solve their debt crises, this same long term fundamental demand for gold as a fiat currency hedge, and thus gold’s up trend, remains in place.
OTHER FUNDAMENTALS THAT SUPPORT GOLD
These are well known, so let’s just list some of the big ones:
- Central banks continue to add to gold reserves.
- The populations of China, India, and other higher growth areas continue to be gold buyers.
- Per The World Gold Council, supplies of physical gold slightly exceed demand. In theory, there is many times this supply sitting in stocks and other equivalents. Much of how you view this data depends on how much you believe the stated physical supply figures are not materially overstated and that the paper equivalents will continue to accurately track the price of gold in times of exceptional demand. Suffice to say, there is reason to wonder. For example, while no one is making any public accusations, a number of nations, Germany among them, have felt a sudden need to audit their gold reserves held abroad. Were there a, ahem, material exception, do you really believe Germany would be quick to go public about it? Given the implications, would you, were you in their position? Just asking.
In summary, all of the fundamental drivers of gold’s decade-plus rally remain in place.
Gold’s long term chart reflects the above fundamentals. Looking at a weekly gold chart below of the past two years, it’s clear that gold’s long term uptrend remains intact. That’s not a trend to fight until it’s decisively broken. [Also read: What, Me Worry? Not When You Look at These Monthly Gold & Silver Charts and Goldrunner: Gold’s Extremely Bullish Backdrop Setting Stage for Run to $2,050, Then $2,400, Then $4,500 and Ultimately $10,000-12,000!]
GOLD WEEKLY CHART JANUARY 2010 TO PRESENT (Source: MetaQuotes Software Corp, thesensibleguidetoforex.com, 03 DEC)
- The downtrend from that high was broken in August, and is still trending higher since then.
- Its pullback from its all time high in 2011 shows no sign of being anything but a normal technical pullback. As of this writing it’s down about 10%.
- It’s long term support zone, defined by the area bounded by its 20 week (yellow) and 50 week (red) EMAs continues to hold and trend higher.
- Strong support is around 1570, less than an 8% drop.
THOSE WHO SHOULD CONSIDER SHORTING GOLD
- Short Term Traders
Like any asset, gold moves up and down within its overall long term trend. That very reachable 8% downside is plenty of room for short term traders who plan on opening and closing positions within a matter of weeks at most, based on a clearly defined set of technical criteria for determining short term strength or weakness, and you’re either monitoring your positions closely or have entered entry and exit limit orders in advance.
THOSE WHO SHOULD NOT SHORT GOLD
- Anyone Who Doesn’t Fit The Above Criteria
In other words, unless gold decisively breaks strong support around 1570, you’re either holding current positions or buying on dips somewhere around 1600, depending on personal considerations. [Read: Now’s Your Time: Take Advantage of Market Trepidation, Act With Uncommon Confidence & Buy (Some) More Gold! and LAST CHANCE to Buy Gold/Silver/PM Stocks At Low Prices – BIG Moves Coming In December, January & February]
THE BIGGER LESSON IMPLIED
For those with significant exposure to currencies at risk of severe long term debasement, you need [to] cut your exposure to them as much as you can, and increase exposure to currencies (such as the CAD) and assets that will benefit from the decline of the USD, EUR, JPY and GBP, among others. Their coming decline is not some wild speculation. For example, it’s been a reality for those based in US dollars for decades. [Read: The USD Is Scraping the Bottom of the Barrel These Days for details.]
…[S]ome fine points to implementing the above…[are] for example:
- The USD remains the safe haven of choice in times of great fear. These periods are likely to occur as long as the assorted debt crises in the developed world remain unresolved.
- The preferred USD denominated or linked assets are those that are most resistant to loss of purchasing power as possible. The same holds for those needing to be liquid in EUR, JPY, or GPB.
- Those seeking to build a reliable income passive income stream want to buy quality dividend stocks that pay you in the better managed currencies that will rise against those mentioned above, like the CAD.
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I view the current market weakness in gold, coupled with the pullback in trader positions, as a shorting opportunity which is strong in terms of reward vs. risk. I have come to that conclusion by questioning the assumptions that many make about it, isolating its fundamental drivers and providing a trading recommendation as to where I believe the price is headed in the future. Let me share my analyses with you. (Words: 1440; Charts: 4; Tables: 1)
This article looks at 7 reasons why gold and silver should experience further weakness over the days/weeks ahead. (Words: 206; Charts: 5)
What would happen if someday the rest of the world decides to reject the U.S. dollar and that process suddenly reversed and a tsunami of U.S. dollars come flooding back to this country? It is frightening to think about. Just take a moment and think of the worst superstorm that you can possibly imagine, and then replace every drop of rain with a dollar bill. The giant currency superstorm that will eventually hit this nation will be far worse than that.
No matter how you look at it, the U.S. dollar is very weak – very close to its all-time lows. If the value of the dollar says anything about the world’s confidence in the U.S. economy, the message is quite pessimistic. The only good thing to be said is that there is a lot of bad news that is priced into the dollar. It might be tough for things to get much worse. (Words: 1054; Charts: 7)
At the end of the day the gold price is not a mystery – it’s a proxy for dollar weakness. After spending the previous fall and winter testing new nominal highs above $1,800, future investors may come to view…2012 as the opportunity of the decade. Gold has shown its strength and retreated. While most investors will take that as a signal that the market has topped, some will take advantage of the general trepidation to add to their positions at hundreds of dollars off the highs. Words: 700
What is developing in the markets is not the beginning of another leg down in gold, but a second chance to get positioned for what should be a very profitable intermediate degree rally over the next 2-3 months. [Let me explain further with a number of charts to support my position.] Words: 460
We’ve been surprised at the recent action in the precious metals complex. During the recent correction the shares were showing quite a bit more strength than the metals. Then the shares took a dive below support yet the metals maintained their recent lows! How do we interpret this wild volatility in the relationship between the shares and the metals? Quite often we look at daily and weekly charts. Now is the time to take a look at the monthly charts which can help us get a better read on the larger trends at hand. Words: 636
Our subscription service provides detailed technical analysis of where the price of gold, silver and precious metal stocks are going short term (in the next week or two), intermediate term (within the next 3-6 months) and long term (the ultimate top) in each stage of their respective bull runs. This service comes with detailed charting based on conventional technical analysis and our proprietary fractal analysis based on the ’70s. Below are some of our latest comments and rationale for expected price movements in gold without illustative charts which are only available to subscribers. Words: 1000
The choice facing the leaders of the world’s largest economies is a simple one: Either they engage in massive money printing, or they let the world slip into another great depression. This article examines why they have no choice but to print money, something which will have significant consequences for everyone. Words: 560
Forecasts are only a guide or a potential road-map as no one can predict the future but we can assess risk, reward and probabilities. [Given that,] we think that the current probabilities favor a secondary bottom in gold stocks and that, very soon, the risk/reward dynamic will be heavily in favor of longs. [I explain and illustrate my conclusions below.] Words: 484; Charts: 2; Tables: 1
As I see it, worsening financial crises lead initially to lower gold prices which are followed by some form of government intervention to alleviate the crises and that action, in turn, eventually results in renewed appreciation in the price of gold. The basic steps in such a transition are really quite straightforward. (Words: 477; Charts: 2)
George Soros’ hedge fund, Soros Fund Management LLC, states in its Nov. 14th 13-f filing that, among other major moves related to gold, the fund has added a $9 million call option position on the GDX which means that management of the fund believes that gold mining equities are extremely undervalued on a short term basis and that major money to be made over the next 6-12 months, via a sharp move higher in the GDX. Words: 405
I am not predicting a future price of gold or the date that gold will trade at $4,000, but I am making a projection based on rational analysis that indicates a likely time period for gold to trade at $4,000 per troy ounce. Yes, $4,000 gold is completely plausible if you assume the following:
Lately analyst after analyst (161 at last count) has been climbing on board the golden wagon with prognostications as to what the parabolic peak price for gold will eventually be. That being said, however, only 51 have been bold enough to include the year in which they think their peak price estimate will occur and they are listed below. Take a look at who is projecting what, by when and why. Words: 644
Since the Financial Crisis erupted in 2007, the US Federal Reserve has engaged in dozens of interventions/ bailouts to try and prop up the financial system…and the amount of money printed is absolutely staggering. As a result of this, inflation hedges, particularly Gold, have been soaring…[but] for gold, for example, to hit a new all time high adjusted for inflation, it would have to clear at least $2,193 per ounce. If you go by 1970 dollars (when gold started its last bull market) it would have to hit $4,666 per ounce. Words: 581
We now have a really strong probability that the correction which started at $1913 on 23 August 2011 has been completed both in terms of Elliott waves and also in terms of time elapsed. If this is correct, the gold price should soon be expressing itself in violent upside action as it moves into the third of third wave which is still targeted to reach $4,500. [Let me explain in detail (with charts) how and why my most recent analyses confirm my earlier target of $4,500.] Words: 1085
According to my 2000 calculations, if interest rates and inflation stay constant over the next 2 years, we could expect to see (with 95.2% certainty) a parabolic peak price for gold of $4,380 per troy ounce by then! Let me explain what assumptions I made and the methods I undertook to arrive at that number and you can decide just how realistic it is. Words: 740
The closing of the gold window back in August 1971 has led governments worldwide to create endless amounts of worthless paper money and the resulting credit bubble has created a world debt exposure of over US$ 1 quadrillion (including derivatives). It has also created perceived wealth for big parts of the world’s population – a wealth which is only backed by promises to pay and by grossly inflated assets. Few people realise that this wealth is totally illusory and will implode considerably faster than the time it took to create it. [Let me explain.] Words: 890
My Fractal Gold chart work is a direct comparison of Gold, today, to the late 70’s Gold Parabola. Thus, “timing” is taken directly from the late 70’s cycle, with price targets created from a combination of the late 70’s Gold price and different technical analysis techniques. We developed a price target back in 2006/ 2007 for Gold to reach the $10,000 to $12,000 range during this Gold Bull and we still stand by that forecast. Let me explain where we are at this point in time.
This is not a typical bull market. Gold is not rising in value, but instead, currencies are losing purchasing power against gold and, therefore, gold can rise as high as currencies can fall. Since currencies are falling because of increasing debt, gold can rise as high as government debt can grow. Based on official estimates, America’s debt is projected to reach $23 trillion in 2015 and, if its correlation with the price of gold remains the same, the indicated gold price would be $2,600 per ounce. However, if history is any example, it’s a safe bet that government expenditure estimates will be greatly exceeded, and [this] rising debt will cause the price of gold to rise to $10,000…over the next five years. (Let me explain further.] Words: 1767
The correlation between the gold price from 1968 until 1979 and from early 2000 until today is an amazing 89.65%! More specifically, the correlation from 1975 until April 1979 and from January 2008 until today is an astonishing 97.83% suggesting that gold will reach an ultimate top of $5,000 per troy ounce before the bubble bursts. Words: 330